COMMISSION STAFF WORKING DOCUMENT Country Report Slovenia 2015  {COM(2015) 85 final}    This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.
Date: 2015-02-26
Institutions: European Commission
Subjects: Slovenia, access to education, bank, corruption, economic consequence, economic disparity, economic growth, economic stabilisation, fight against unemployment, investment, loss, macroeconomics, poverty, structural adjustment













EUR-Lex - 52015SC0043R(01) - EN











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52015SC0043R(01)

COMMISSION STAFF WORKING DOCUMENT Country Report Slovenia 2015  {COM(2015) 85 final}    This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /* SWD/2015/0043 final/2 */









Executive
summary  1
1.     Scene setter: economic situation and outlook  3
2.     Imbalances, risks, and adjustment 10
2.1.   Interplay of banking sector and corporate sector
restructuring  11
2.2.   Efficiency and costs of State Owned and State
Controlled Enterprises, and their impact on investment and business environment 23
2.3.   Competitiveness, investment and the role of FDI 35
3.     Other structural issues 47
3.1.   Fiscal policy and taxation  49
3.2.   Labour market, education and social policies 55
3.3.   Business environment and Research &
Development 61
3.4.   Transportation, energy and environment 65
3.5.   Public administration and civil justice  67
AA.  Overview Table  70
AB.   Standard Tables 78
LIST OF Tables
1.1.     MIP scoreboard indicators - Slovenia   8
1.2.     Key economic, financial and social indicators -
Slovenia   9
2.1.1.  Overview of executed recapitalisation measures
and asset transfers to the BAMC   12
2.2.1.  The network of state ownership and state control
in Slovenia   24
2.2.2.  Relative importance of SOEs/SCEs (as % of total
NFCs) 25
2.2.3.  Total fiscal and economic implications of
financial and non-financial SOEs/ SCEs 31
AB.1.  Macroeconomic indicators 78
AB.2.  Financial market indicators 79
AB.3.  Taxation indicators 80
AB.4.  Labour market indicators 81
AB.5.  Social indicators 82
AB.6.  Product market performance and policy indicators 83
AB.7.  Green Growth  84
LIST OF Graphs
1.1.         Real
GDP growth and contributions 3
1.2.         Export market share  4
1.3.         Export performance  4
1.4.         Drivers of the trade balance surplus, 2007-2014  4
1.5.         Current account 4
1.6.         Net international investment position  5
1.7.         Private non-financial sector debt-to-equity ratios in the EU
(%) 6
1.8.         Deleveraging contribution dynamics, debt-to-GDP change  6
1.9.         Non-financial companies - change in investment 2008-13, % of
value added   7
1.10.       HICP and consumer confidence  7
2.1.1.      Household deposit of sector - total deposits by type of bank  12
2.1.2.      Deposit rates (< 1 year) 14
2.1.3.      Deposit rates (> 1 year) 14
2.1.4.      Total assets and loans of the Slovenian banking system   14
2.1.5.      Composition of banks' liabilities 15
2.1.6.      Net interest margin by bank  15
2.1.7.      Growth rate of interest income and expenses of the banking
sector 15
2.1.8.      Change in stock of domestic credit and contributions 16
2.1.9.      Credit growth — Total loans 16
2.1.10.    Short-term interest rates (< 1 year) 16
2.1.11.    Long-term interest rates (>1 year) 17
2.1.12.    Indebtedness of the corporate sector 17
2.1.13.    Cash flow capacity and profitability of the corporate sector 17
2.1.14.    Credit growth — corporate loans (incl. SME) 18
2.1.15.    Credit growth — foreign loans 18
2.1.16.    New lending vs. prolongation  18
2.1.17.    NPLs by type of bank  19
2.1.18.    NPL ratios by type of bank  19
2.1.19.    Structure of NPLs by bank (Q3 2014) 20
2.1.20.    Coverage ratios by type of bank  20
2.2.1.      Share of SOEs/SCEs in sectoral value added (as % of total
sectoral value added), 2013  24
2.2.2.      Employment, 2013 – public, private and SOEs/SCEs 25
2.2.3.      Book value of equity of SOEs/SCEs in Europe (as % of GDP) 25
2.2.4.      OECD indicators for product market regulation (2013) 26
2.2.5.      Employment at SOEs/SCEs in Europe (as % of total employment) 27
2.2.6.      Leverage ratio of SOEs/SCEs and all NFCs (excl. energy and
public utilities sectors) 27
2.2.7.      Profitability (ROCE) of SOEs/SCEs and foreign-owned companies
relative to domestic privately owned companies (2004-2013 average) 28
2.2.8.      Profitability (ROE) of SOEs/SCEs and foreign-owned companies
relative to domestic privately owned companies (2004-2013 average) 28
2.2.9.      Leverage ratio of SOEs/SCEs and foreign-owned companies
relative to domestic privately owned companies (2013) 29
2.2.10.    Total factor productivity of SOEs/ SCEs and foreign-owned
companies relative to domestic privately owned companies (in %), 2004-2013
average  29
2.2.11.    Profitability (ROE) of SOEs/ SCEs by sector in Slovenia and
other CEE countries (aggregate), 2013  29
2.2.12.    Costs per employee of SOEs/ SCEs and foreign-owned companies
relative to domestic private owned companies (2004-2013 average) 30
2.2.13.    Debt leverage ratio of SOEs/SCEs in Slovenia and other CEE
countries (2013) 30
2.2.14.    Labour productivity SOEs/ SCEs and foreign-owned companies
relative to domestic privately owned companies (in %), 2004-2013 average  30
2.2.15.    Total government deficit and deficit increasing state
interventions related to SOEs/SCEs 32
2.2.16.    Total government debt and debt increasing state interventions
related to SOEs/SCEs 32
2.2.17.    Subsidies to all NFCs relative to operating profit (EBITDA)
and share of subsidies to SOEs/ SCEs 32
2.2.18.    Other fixed assets of SOEs/ SCEs and foreign-owned companies
relative to domestic privately owned companies (as % of total assets ),
2004-2013 average  33
2.2.19.    Capital expenditure relative to operating profit (EBITDA) of
SOEs/ SCEs and all NFCs 34
2.3.1.      Real effective exchange rate deflated by ULC in total economy
(ULCE) and in manufacturing (ULCM) 35
2.3.2.      REER (ULCE) and new sectoral REER in Slovenia   36
2.3.3.      Sectoral REER aggregate in SI and V4  36
2.3.4.      Nominal Unit Labour Cost 36
2.3.5.      SI NULC in tradable and non-tradable sectors 37
2.3.6.      Productivity per hour worked   37
2.3.7.      Nominal compensation per employee  38
2.3.8.      Geographical and sectoral composition of nominal rate of
change of goods exports 39
2.3.9.      Density distributions of exports by quality  39
2.3.10.    Non-cost competitiveness vis-à-vis EU28  39
2.3.11.    Investment in the private sector 40
2.3.12.    Private investment and private consumption  40
2.3.13.    Potential output and components 41
2.3.14.    Non-financial corporations savings and investment 41
2.3.15.    GFCF by type  41
2.3.16.    Investment by institutional sector 42
2.3.17.    Non-residential investment and NFC debt 42
2.3.18.    Inward FDI 43
2.3.19.    FDI inflows 43
2.3.20.    FDI inflows in Slovenia, Visegrád 4, EU   44
2.3.21.    FDI stock per sector in Slovenia, 2013  44
2.3.22.    Sectoral composition of greenfield FDI in Slovenia, 2011-2013  44
2.3.23.    FDI stock in tradable and non-tradable sectors 45
2.3.24.    Origin of inward FDI, stocks in 2013  45
2.3.25.    FDI stocks in Slovenia, Visegrád 4, and the EU   45
3.1.1.      Gross debt % of GDP — DSA analysis 50
3.1.2.      Gross debt % of GDP — institutional scenario  50
3.1.3.      Breakdown of the population by age groups in Slovenia   51
3.1.4.      Sustainability of the pension system in Slovenia   52
3.2.1.      Employment in tradable and non-tradable sectors 55
3.2.2.      Long-term unemployment as % of active population  55
3.2.3.      Employment rate of vulnerable groups of population in
Slovenia and the EU28  56
3.2.4.      Cyclicality of temporary employment 57
3.2.5.      Percentage of low achievers on PISA tests in 2009 and 2012 in
Slovenia   57
3.2.6.      Public expenditure for formal education (EUR million) 58
3.2.7.      The likelihood of the old-age poverty rate  59
3.2.8.      Social exclusion indicators 59
3.3.1.      Components of administrative burden in Slovenia   61
3.3.2.      Willingness of banks to provide the loans in the last six
months 62
3.3.3.      Level of intra-EU establishment 63
3.3.4.      R&D investment 63
3.5.1.      Institutional strengths and weaknesses in Slovenia   67
3.5.2.      Government effectiveness 68
3.5.3.      Diversion of public funds 69
LIST OF Boxes
1.1.     Economic surveillance process 8
2.1.1.  Measures taken by the Bank of Slovenia to improve
corporate governance and risk management in banks 13
2.1.2.  Structure of debtor companies liable for the NPLs 21
3.3.1.  Overview and general assessment of absorption
capacity for EU funds 64
In 2014, the Slovenian economy rebounded
strongly. After a cumulative decline of more than
9% between 2008 and 2013, real GDP is estimated to have grown by 2.6% in 2014.
Growth has been predominantly export-driven but domestic demand has also begun
to recover. The recovery in investment expenditure has been driven mainly by
infrastructure construction financed through EU funds, while private sector
investment remains subdued. Real GDP is expected to grow by 2.1% on average in
2015-16. The unemployment rate remains below the EU average, falling to 9.8% in
2014 and is expected to decline further. Public debt is forecast to stand at
83% of GDP in 2015, gradually increasing in the medium term. 
In March 2014, the Commission concluded
that Slovenia was continuing to experience excessive macroeconomic imbalances,
which required specific monitoring and continued strong policy action. This Country Report assesses Slovenia's
economy against the background of the Commission's Annual Growth Survey, which
recommends three main pillars for the EU's economic and social policy in 2015:
investment, structural reforms, and fiscal responsibility. In line with the Investment Plan for Europe, it also explores
ways to maximise the impact of public resources and unlock private investment.
Finally, it assesses Slovenia in the light of the findings of the 2015 Alert
Mechanism Report, in which the Commission found it
useful to examine further the persistence of imbalances or their unwinding. The
main findings of the in-depth review contained in this country report are:
·       The high level of non-performing loans and low credit demand from
creditworthy firms may have implications for the viability of the banking
sector. Although confidence in the banking sector
has returned, credit growth remains negative and the banks' profitability and
viability can be further enhanced. Non-performing loans to non-financial
corporations are still higher than before the crisis. Continued weakness in the
cash flow capacity of the firms constrains lending opportunities and poses
further risks to the asset quality and profitability of the banking sector.  
·       High debt, deleveraging pressures and ongoing restructuring in the
corporate sector adversely affect private investment and growth. The corporate sector has been deleveraging since the peak in 2010
but remains undercapitalised, which affects the sector's investment capacity.
Low investment has implications on productivity and competiveness of the companies,
their ability to innovate and also erodes Slovenia's potential growth.
·       A high level of state involvement combined with weak corporate
governance distorts resource allocation, and hampers investment and growth. The state is the largest employer, asset manager and corporate
debtor in Slovenia. The state involvement in the economy has had significant
fiscal and economic implications for Slovenia since the onset of the crisis.
State-owned entities have underperformed compared to their privately owned
peers in terms of productivity and profitability at both national and regional
level.  
·       External competitiveness and external sustainability have improved
considerably and risks appear to have subsided.
Wage restraint since 2011 together with increased productivity and gains in
non-cost competitiveness have helped to improve significantly Slovenia’s
external performance and position in terms of flows and stocks. 
·       The large increase in public debt in recent years creates additional
challenges. A prolonged recession coupled with
significant bank recapitalisations has resulted in a sharp rise in public debt.
Fiscal consolidation measures in recent years, particularly on the expenditure
side, have been of a temporary nature and reform of the fiscal framework is
lagging behind. Furthermore, the ageing population puts pressure on the
sustainability of the pension and long-term care systems.
·       Labour market reform has addressed segmentation and introduced
greater flexibility. The labour market situation is
showing signs of improvement but structural problems persist as regards to
long-term unemployment and the low employment rates of low-skilled and older
workers.
·       An improved business environment will assist in attracting
productive investment, including foreign direct investment. The business environment is hindered by high government involvement
and regulation, which poses obstacles to the inflow of productive investment.
The latter is important as a source of fresh equity and funding, technology
transfer, infrastructure and trade development.
·       There is a renewed commitment to fight corruption and increase the
effectiveness of public administration and the judiciary. The government adopted a fresh two-year programme in January 2015,
while the strategy for public administration is expected to be adopted in
February 2015. The focus is now on prioritisation and implementation.
Overall, Slovenia has made some progress
in addressing the 2014 country-specific recommendations. Policy measures to stabilise the banking sector have been
implemented. The Bank Asset Management Company is now fully operational. The
restructuring of four major state-owned banks and the wind-down of two smaller
domestic banks are on track. A corporate restructuring master plan and a
centralised task force were established. A new corporate governance code for
state-owned enterprises was adopted. The Slovenian Sovereign Holding,
responsible for the management and divestment of state assets, is now fully
operational. A draft asset management strategy is yet to be approved by the
Slovenian Parliament, and will be followed by the release of the divestment
schedule for a number of well-targeted state assets. The privatisation
programme is progressing, albeit with delays. The sale process for the two
largest assets is expected to be signed by April 2015.
This country report highlights the policy
challenges stemming from the analysis of macro-economic imbalances, namely:
·       Boosting long-term profitability and reducing non-performing loans
in the corporate sector will make for a healthier banking sector. There is scope for further consolidation of the banking sector,
which could be facilitated through the continuation of the privatisation
process.
·       Further deleveraging of the corporate sector would help restore the
conditions for a rebound of private investment. The
swift restructuring of the corporate sector through the application of existing
tools, including the Bank Asset Management Company and the new insolvency
legislation, will boost the recovery of cash-flows in the corporate sector.
Attracting fresh equity investment from abroad can help reduce the high debt
leverage and restore creditworthiness, an important prerequisite for resolving
non-performing loans and improving banks’ profitability.
·       Further disentangling the complex network of state-owned enterprises
would help mitigate future risks to public finances. Slovenia could take advantage from the current positive market
momentum to divest selected state-owned enterprises. This would assist in
attracting foreign direct investment and improving the economic outlook. Sound
management and enhanced corporate governance policies for state-owned assets
can help mitigate the risks of future state support.
·       The right fiscal framework coupled with comprehensive expenditure
reviews can help to enhance the sustainability of public finances. In particular, they help shift the focus of budgetary execution
from temporary measures and linear across-the-board cuts to expenditure
rationalisation and efficiency savings. The comprehensive review of expenditure
in the health sector can provide a useful blueprint for future reviews in other
key policy areas such as education. While one-off spending reviews can have a
major impact, the maximum benefits are obtained when they become a regular part
of the budget process.
·       Attracting foreign direct investment will be essential in ensuring a
sustainable recovery. The new government has set an
ambitious target of reaching the EU average stock of foreign direct investment
by 2017. The forthcoming strategy could include a coherent set of both
facilitation and promotion measures, including substantially reducing the
administrative burden on both local and foreign companies.
Growth performance
With a loss of more than 9% of GDP
between 2008 and 2013, Slovenia experienced one of the largest economic
contractions among euro area countries. A
foreign-financed credit boom facilitated by the euro adoption fuelled
aggressive leveraging of the corporate sector and a construction bubble. After
a sharp contraction in 2009, the economy grew in 2010 and 2011, but entered a
second recession in 2012. While a steep drop in investment was the initial
cause of the downturn, consumption began to decline from 2012 onwards (Graph 1.1). Prior to the crisis, Slovenia missed
an opportunity to improve the resilience of the economy to shocks and its
response was insufficient. Slovenia therefore felt the effects of the crisis
more than other Member States.
 Graph 1.1:     Real GDP growth and contributions 
 Source: European Commission. 
In 2014, Slovenia began to emerge from
the recession. According to the Commission 2015
winter forecast ("Commission Forecast" hereafter) real GDP is
projected to have grown by 2.6% in 2014 (Graph 1.1). Growth has been predominantly
export-driven but domestic demand has also started to show signs of recovery.
Private consumption boosted by improving sentiment and decreasing unemployment
(9.8% in 2014) has contributed to this improvement. The recovery in investment
expenditure has been driven mainly by construction co-financed through EU
funds. While potential growth has begun to recover, it remains significantly
below pre-crisis levels, with labour and capital accumulation providing no
contribution in 2014 (Graph 2.3.13).
Growth is expected to continue. In 2015, economic growth is forecast to decelerate to 1.8%, before
picking up to 2.3% in 2016 (Graph 1.1). The deceleration in 2015 is expected
to be driven by a slowdown in the growth of public investment. However,
increasing private investment in equipment and machinery is expected to pick up
progressively and support future growth. The acceleration in 2016 stems mainly
from an assumed resumption in growth of public consumption.
Trade performance, current account and NIIP
On the export side, Slovenia has
regained export market share since 2013. This trend
strengthened in the first half of 2014 following the substantial market share
losses suffered between 2008 and 2012 (Graph 1.2). Other indicators, such as the European
Commission's export performance indicator, ([1]) offer a slightly more positive picture already as from 2010 (Graph
1.3). Despite a significant underperformance
in 2009, export performance measured by this indicator evolved thereafter in
line with the euro area and outperformed it in 2011. Even though Slovenia
lagged behind peers such as the Czech Republic, Hungary, Poland and Slovakia
between 2009 and 2012, the gap was reduced significantly in 2013.
 Graph 1.2:     Export market share 
 Source: European Commission, WTO. 
 Graph 1.3:     Export performance 
 Visegrád 4 – export weighted average Source: European Commission. 
The current account surplus widened to
4.8% of GDP in 2013, mainly due to the increase in the trade balance (Graph 1.5). While services make up most of the
trade surplus, the goods balance also turned positive in 2012 and is expected
to have increased further in 2014. The rebound in exports has not yet been matched
by a comparable recovery of imports, due to weak domestic demand, especially
investment. The change in the trade balance is therefore driven predominantly
by an increase in exports, rather than by a fall in imports (Graph 1.4). The income balance remains in deficit
at average levels for a converging economy with a relatively high share of
foreign capital. The balance of current transfers continues to play a marginal
role in the current account balance.
 Graph 1.4:     Drivers of the trade balance surplus, 2007-2014 
 Change in trade flows, current prices, 2007-2014(e). Source: European Commission. 
 Graph 1.5:     Current account   
 Source: European Commission. 
After years of deterioration, Slovenia's
net international investment position (NIIP) has started to improve (Graph 1.6). From a moderate negative level of
-17.1% of GDP in 2006, the NIIP deteriorated rapidly during the crisis,
reaching its lowest level of -45.8% of GDP in 2012. The adjustment of the
current account on the back of a rise in net exports helped to reverse the
trend in 2013 and 2014. Driven by strong current account surpluses the NIIP is
expected to continue to improve in 2015 and 2016. Two counteracting trends have
changed the structure of the NIIP – the significant reduction in net foreign
liabilities of monetary and financial institutions since the peak of the crisis
(Section 2.1), and the increase in general government borrowing on the
international markets to finance the high 2013 deficit. The general government
deficit increased to 14.6% of GDP in 2013, of which 10.1% of GDP was related to
bank recapitalisations. This is consequently reflected in the increasing
proportion of government debt securities which now form the biggest component
(-18.8% of GDP) of NIIP in relative terms. Foreign direct investment (FDI) is
on the other hand limited to only -15.9% of GDP. In view of the negative NIIP,
current account surpluses are required in order to improve Slovenia’s external
position. The current account is expected to stabilise at around 6% in 2015
before starting to decline slowly, due to an expected progressive reduction in
the trade balance surplus in line with accelerating domestic demand.
Nevertheless, an elevated current account surplus is expected to persist as
long as deleveraging continues.
 Graph 1.6:     Net international investment position 
 Source: European Commission. 
Public sector debt has increased
significantly from 22% of GDP in 2008 to 82% in 2014. While exceptional items, particularly bank recapitalisations, have
contributed greatly to this increase, sustained primary deficits over the
period have also played a part. On a no-policy-change assumption, public sector
debt is expected to steadily increase to 87% of GDP in the medium term (i.e.
until 2025). Fiscal discipline is required to reduce the debt-to-GDP ratio (see
Section 3.1).
Private sector deleveraging
Private sector indebtedness is at the
lower end of the scale in the euro area, reflecting one of the lowest levels of
household debt, but relatively high corporate debt.
Despite doubling in the 2000s, private debt remained at a comparatively low
level of 103.6% of GDP in 2013. However, there are substantial differences
between the corporate and household sectors. At 29.6% of GDP in 2013,
Slovenia’s households had the 2nd lowest level of indebtedness in
the euro area. Conversely, the indebtedness of Slovenia's corporates is
considerably higher, at 74% of GDP in 2013. While this is still close to the
euro area average, the ratio of the corporate debt to equity is relatively high
(Graph 1.7). Further analysis of microeconomic data
is required as corporate debt in Slovenia is unevenly distributed across firms
and is high when compared to their earnings and cash flow capacity to repay
(Section 2.1). Non-financial corporations began to deleverage actively ([2]) in 2010 and had reduced their indebtedness relative to GDP by 13
pps. by 2013. 
 Graph 1.7:     Private non-financial sector debt-to-equity ratios in the EU (%) 
 Source: European Commission. 
Debt in the corporate sector remains
high relative to firms’ capacity to repay and is concentrated in a small number
of large firms. About 100 firms with the largest
excess debt ([3]) held 42% of
the total excess debt in 2013 ([4]). The ratio of excess debt to net financial debt varies from sector
to sector. Excess debt accounts for 92% of net financial debt in financial and
insurance activities, and 78% in real estate activities (it is primarily
unprofitable firms that contribute to the high figures), while manufacturing
has one of the lowest figures at 26.2%. In addition, 90% of these over-indebted
companies are focused on the domestic market and their capacity to repay the
debt is thus dependent on a recovery in domestic demand ([5]).
Slovenia deleveraged actively, resulting
in negative credit flows, but struggled against contracting GDP until 2013. The change in the debt-to-GDP ratio can be attributed to four main
drivers: net credit flows (loan repayments and lack of new lending), real GDP
growth, inflation through the GDP deflator and other changes such as valuation
changes (Graph 1.8). Since the peak of indebtedness in
2010, Slovenia's corporations deleveraged actively resulting in negative credit
flows but contracting GDP exerted upward pressure on the ratio. In 2014 this
has changed (real GDP is estimated to have increased by 2.6%) and Slovenia is
again benefiting from this deleveraging channel. In addition, valuation changes
and restructuring have contributed positively to the corporate debt reduction.
However, with inflation at historically low levels (0.4% in 2014 and forecast
at -0.3% in 2015), the borrowers can no longer depend on inflation to reduce
the real value of their debt.
 Graph 1.8:     Deleveraging contribution dynamics, debt-to-GDP change 
 Source: European Commission. 
Active deleveraging has had a negative
impact on domestic demand. Investment has been
particularly affected in Slovenia. While the saving rate of non-financial
corporations remained largely unchanged, investment took the biggest hit in
Slovenia compared to the euro area (Graph 1.9). Unless reversed, this trend will have
negative consequences on productivity and economic growth in the medium and
long term (more information on investment in Section 2.3).
Deleveraging is expected to continue,
albeit at a slower pace. Weak credit market
conditions and the remaining high indebtedness of the corporate sector relative
to earnings create pressure for further active deleveraging. This process is
likely to be characterised by continued loan repayments and limited new lending
activity. DG ECFIN estimates ([6]) that the corporate sector will keep facing deleveraging pressures
in the short term. However, deleveraging needs of households appear limited and
the household sector’s balance sheet is expected to stop contracting in 2015.
Future GDP growth should contribute to reducing Slovenia's debt burden. This in
turn should reduce the drag on aggregate demand and stress for asset markets. 
 Graph 1.9:     Non-financial companies - change in investment 2008-13, % of value added 
 Source: European Commission. 
Employment and social conditions
The labour market showed signs of
improvement in 2014. After five years of rising
unemployment, the trend started to reverse. However, structural challenges
remain. Long-term unemployment increased in 2014 making up over half of the
total unemployed. Youth unemployment rate stabilised marginally below the EU
average. The number of people at risk of poverty or social exclusion has risen consistently
since 2009.
Inflation 
Three different inflationary patterns
are observable over the years in Slovenia. Prior to
the financial crisis, Slovenia had experienced increasing inflation, which
remained consistently above the euro area average and peaked at 6.5% in the
first quarter of 2008. Between 2009 and 2012, core inflation remained at low
levels and developments in relation to the harmonised index of consumer prices
(HICP) were mainly attributable to changes in energy and unprocessed food prices.
In the following period core inflation stabilised, but since the third quarter
of 2013 it has gradually declined reflecting weaker domestic demand and
declining import prices. In 2014, the steep fall in the oil price and declining
food prices had a significant impact in terms of driving headline inflation
down. Taking into account the improving consumer confidence and its lagged
correlation with the headline inflation, the decreasing trend in HICP is
expected to bottom out only in the second quarter of 2015. Deflation of 0.3% is
projected in 2015 before returning to a moderate inflation rate of 0.9% in 2016
as the economic recovery strengthens (Graph 1.10).
 Graph 1.10:    HICP and consumer confidence 
 Source: European Commission. 
 Table 1.1:       MIP scoreboard indicators - Slovenia 
 Source:  European Commission. 
  Box 1.1: Economic surveillance process The Commission’s Annual Growth Survey, adopted in November 2014, started the 2015 European Semester, proposing that the EU pursue an integrated approach to economic policy built around three main pillars: boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation. The Annual Growth Survey also presented the process of streamlining the European Semester to increase the effectiveness of economic policy coordination at the EU level through greater accountability and by encouraging greater ownership by all actors.   In line with streamlining efforts this Country Report includes an In-Depth Review — as per Article 5 of Regulation no. 1176/2011 — to determine whether macroeconomic imbalances still exist, as announced in the Commission’s Alert Mechanism Report published on November 2014.   Based on the 2014 IDR for Slovenia published in March 2014, the Commission concluded that Slovenia was experiencing excessive macroeconomic imbalances requiring decisive policy action, in particular the risk stemming from an economic structure characterised by weak corporate governance, high level of state involvement in the economy, losses in cost competitiveness, the corporate debt overhang, and the increase in government debt.   This Country Report includes an assessment of progress towards the implementation of the 2014 Country-Specific Recommendations adopted by the Council in July 2014. The Country-Specific Recommendations for Slovenia concerned fiscal policy and long-term fiscal stability (including pension reform and long-term care); effective tailor-made active labour-market policy measures, skills mismatches, wages and labour market segmentation; restructuring of the banking and corporate sectors, including Slovenian Sovereign Holding; privatisation; selected aspects of the business environment; and fighting corruption. 
 Table 1.2:       Key economic, financial and social indicators - Slovenia 
 Source: European Commission, ECB. 
Balance sheet contraction, rising
non-performing loans (NPLs), erosion of capital buffers and liquidity pressures
affected the Slovenian banking system from the onset of the crisis. All Slovenian banks, large state-owned banks in particular, have
suffered sizeable losses and have significantly shrunk their balance sheets
since the beginning of the crisis in 2008. The first phase of deleveraging was
triggered by the international financial crisis. Many elements specific to
Slovenian, such as the high debt leverage of the corporate sector, the
significant involvement of the state in the economy and shortcomings in risk
management and corporate governance, were revealed and reinforced by the
crisis, triggering a sharp increase in NPLs in banks. These credit quality
trends, together with deteriorating collateral values, quickly eroded capital
bases and market confidence. 
State of play of banking and corporate
restructuring
Following the extensive overhaul of the
banking system in 2013 Slovenia took further measures to stabilise the banking
sector in 2014. On 12 December 2013 the Slovenian
authorities announced their strategy for the restructuring of the financial
sector based on the outcome of the Asset Quality Review and Stress
Test. The Stress Test identified capital deficits of up to EUR 4.8
billion, EUR 3.2 billion of which was provided by the state in December 2013.
These measures were reinforced by further action designed to stabilise the
banking sector in 2014, such as the further capital increase of Abanka with EUR
243 million in October and the recapitalisation of Banka Celje with EUR 190
million together with a transfer of assets of EUR 412 million (gross
value) in December. Overall so far six banks have received capital amounting to
EUR 3.6 billion (Table 2.1.1). Foreign banks that took part in the
2013 stress test exercise (UniCredit Bank, Raiffeisen Bank, Hypo Group Alpe
Adria) have also substantially improved their capital positions mainly through
reduction of risk-weighted assets and/or direct capital injections by their
parent banks. Although the results of the ECB comprehensive assessment
published in October 2014 identified a joint capital shortfall of EUR 65.3
million for both NKBM and NLB ([7]), no further support from the state was required as the exercise
found that the measures taken to improve structural profitability and the
retained earnings of the banks in 2014 were sufficient to cover the shortfalls
identified. Bank of Slovenia has reacted to the shortcomings identified by the
Asset Quality Review exercise of 2013 and has introduced two macro-prudential initiatives aimed at easing competition for
deposits – (i) a cap on deposit interest rates introduced in 2012 and (ii) minimum
requirements for the ratio of annual changes of the stocks of loans to non-bank
deposits to slow the rapid decline in the LTD ratio (Box 2.1.1).
The Bank Asset Management Company
(BAMC) has set out its strategy and business plan and is now fully
operational. The BAMC has so far received assets
with a total gross value of approximately EUR 5 billion (net value of EUR 1.7
billion) from four state-owned banks (Nova Ljubljanska Banka - NLB, Nova
Kreditna Banka Maribor - NKBM, Abanka and Banka Celje) and two smaller domestic
banks in wind-down - Probanka and Factor Banka (Table 2.1.1). Approximately two thirds of the
exposures are in default. The objective of the BAMC for these loans will be to
acquire the collateral (mostly real estate but also some equity and company
assets). The remaining approximately 100 cases in the portfolio of the BAMC are
companies with potentially viable core activities, which could be maintained if
they were subject to an appropriate financial and operational restructuring.
 Table 2.1.1:     Overview of executed recapitalisation measures and asset transfers to the BAMC 
 Source: Bank of Slovenia, European Commission. 
The restructuring of the highly
leveraged corporate sector remains a key challenge for the banking sector and
the Slovenian economy as a whole. The Ministry of
Finance supported by the Bank of Slovenia has set up a comprehensive
restructuring master plan. A task force has been established to monitor and
coordinate the overall restructuring process, to facilitate the negotiation
process between all stakeholders involved and to provide the necessary guidance
and advice. The coordinating body of the task force is composed of
representatives of the Ministry of Finance, the Bank of Slovenia, the Ministry
of Economics, the Ministry of Justice and the BAMC. It meets twice a month. 
Credit and financial developments since
mid-2013
The restored confidence in the Slovenian
banking system has eased liquidity pressures.
Confidence in the major state-owned banks has returned and there has been an
inflow of retail funds since the beginning of 2014 (Graph 2.1.1). The market exit of Probanka and
Factor Banka, two smaller banks that were competing intensively for deposits
until September 2013, could have relieved the competition on deposits. Since
mid-2013 deposit rates decreased by approximately 150-200 basis points (Graph 2.1.2 and Graph 2.1.3). There are several reasons for the
closing of the gap in interest rates for deposits between state-owned and
foreign-owned banks, particularly the improved funding conditions of
state-owned banks, the cap on deposit interest rates and the restoration of
consumer confidence in state-owned banks.      
 Graph 2.1.1:   Household deposit - total and by type of bank 
 Source: Bank of Slovenia, Fitch. 
Policy measures taken in 2013 and 2014
have facilitated the deleveraging of banks' balance sheets. Since 2012, negative credit flows have led to a steady decline in
the loan stock, in particular in the state-owned banks. The current
deleveraging process has contributed to this decline. However, there are
several one-off factors that have also affected the stock on an aggregate
level. The commencement of the orderly winding down of Factor Banka and
Probanka and the additional significant amount of provisions required as a
result of the 2013 asset quality review further contributed to the strong
decline in 2013.
 Box 2.1.1: Measures taken by the Bank of Slovenia to improve corporate governance and risk management in banks Following the conclusion of the asset quality review (AQR) and the stress test carried out in 2013, which revealed serious shortcomings in the banks’ business processes and risk management practices, Bank of Slovenia asked all banks involved in the exercise to respond to the AQR findings that affected them. Three banks that benefited from state aid were asked to submit an action plan by the end of March 2014 to address the deficiencies identified in the AQR and to implement their plan before the end of 2014. Implementation of these action plans is being assessed by Bank of Slovenia in cooperation with the single supervisory mechanism (SSM). The banks have improved practices in many areas, especially underwriting standards and NPL work-out. Since December 2014, NPL and forbearance definitions are in line with EBA definitions in all banks. New and tighter corporate governance rules were introduced during 2014, in line with international standards. Further measures could be taken to address some shortcomings identified by the AQR in 2013 (e.g. on IT, data and quantitative aspects), but overall, risk management practices appear to have significantly improved during 2014 Bank of Slovenia has also introduced some additional regulations regarding banks’ corporate governance, relating to the membership and functioning of banks’ boards, strengthening the provisions on the management of credit, market and operational risks, on the internal control functions (i.e. internal audit, compliance and information security) and diligence of members of the management body, risk management and remuneration. Bank of Slovenia has also taken steps to improve its own effectiveness on banking supervision and in the area of corporate governance. In 2012, Bank of Slovenia requested an IMF review of its supervisory practices. On the basis of IMF’s recommendations, a detailed action plan was drawn up. In spring 2014, Bank of Slovenia carried out an internal reorganisation and again requested IMF technical assistance. Among other issues, this identified a lack of supervisory staff. A new central credit registry (CCR) for corporates and private persons is also being set up. This is expected to be operational from 2016 and will be connected to the other CCRs within the euro area to be used for micro- and macro-supervision and research purposes. During 2013 and 2014, with the instability in the banking sector and the AQR and stress test that followed, Bank of Slovenia’s on-site supervision activity was stopped due to lack of resources. On-site supervision activities will be resumed in 2015. Following a bilateral agreement, the SSM will also support Bank of Slovenia in monitoring non-systemic banks, which will certainly contribute to carrying out supervisory activity with adequate resources, based on high international standards. It will be important to monitor closely how the banks implement the new regulatory guidance on corporate governance and risk management and how they have addressed the shortcomings identified in the two AQRs to make sure the events of the recent past are not repeated. 
The significant fall at the end of 2013 was
driven by the transfers of NPLs from NLB and NKBM to the BAMC (Graph 2.1.4). The additional transfers to the BAMC
from Abanka in October 2014 and Banka Celje in December 2014 further reduced
the aggregate level across the system.
 Graph 2.1.2:   Deposit rates (< 1 year) 
 Source: Bank of Slovenia. 
The improvement of the funding situation
and the reduction of the loan books allowed banks to repay most of their ECB
borrowing and a significant portion of their interbank debt (Graph 2.1.5). Slovenian banks participated in the
September and December 2014 Targeted Longer Term Refinancing Operations
(TLTROs) for EUR 706 million (71% of potential volume). The funds helped the
banks to continue the early repayment of the three-year LTROs settled in 2011
and 2012, of which 90% have been repaid. NLB regained access to funding in the
international capital markets in July 2014 supported by favourable market
conditions ([8]).In view of
the improved funding situation in the banking system the deleveraging pressure
on domestic banks is expected to ease. Foreign banks have also deleveraged
although their balance sheets have been reducing at a slower pace ([9]). Many foreign-owned banks (Raiffeisen Bank, Hypo Group Alpe Adria)
have actively reduced their exposure to the Slovenian market and repaid part of
the intra-group lending to their parent institutions (see the significant
increase of foreign loans in foreign banks in Graph 2.1.15). Although loan to deposit ratios of
foreign-owned banks have decreased faster than in domestically-owned banks they
are still higher due to the outstanding stocks of intra-group funding.
 Graph 2.1.3:   Deposit rates (> 1 year) 
 Source: Bank of Slovenia. 
 Graph 2.1.4:   Total assets and loans of the Slovenian banking system 
 Source: Bank of Slovenia. 
 Graph 2.1.5:   Composition of banks' liabilities 
 Source: Bank of Slovenia. 
After the significant losses of the past
three years, the banking sector returned to profitability in 2014. Net interest margins and profitability have started to recover
(Graph 2.1.6). The higher net interest margins are
mainly driven by the sharp reduction of interest rates on non-banking deposits
(Graph 2.1.7). The improved profitability can be
attributed to the significantly lower level of impairments and provisions and
the growth in net interest income. For NLB and NKBM some beneficial effects on
interest income arose from the high yield (approximately 4%) on government and
BAMC bonds that the banks received in December 2013 in the context of recapitalisations
and asset transfers. However, this source of revenue is temporary as the bonds
mature in 2015 and 2016. The government and BAMC bonds received by Abanka and
Banka Celje in 2014 were issued at significantly lower yield in line with the
market developments (approximately 1.5%).
 Graph 2.1.6:   Net interest margin by bank 
 Source: Fitch. 
 Graph 2.1.7:   Growth rate of interest income and expenses of the banking sector 
 Source: Bank of Slovenia. 
Remaining challenges
Lending to the real economy remains
constrained. Credit growth in Slovenia is still
negative (Graph 2.1.8), although that is due largely to the
one-off transfer of NPLs to the BAMC. The negative credit growth is more
pronounced for domestic-owned than for foreign-owned banks, partly because of
the speed of deleveraging of domestic-owned banks but also due to differences
in market behaviour and the banks' risk aversion (Graph 2.1.9). The negative trend in lending to
non-financial corporates is closely linked to the low cash-flow capacity and
high leverage of the Slovenian corporate sector, the remaining high level of
corporate NPLs on banks' balance sheets and the ongoing financial and
operational restructuring in the corporate sector. The number of creditworthy
corporates requesting loans in the domestic market is low and competition for these
clients is intense. Most of the nationally recognised, well-established and
financially sound companies have access to financing abroad at more competitive
rates, as loan rates (especially short-term) in Slovenia tend to be above those
of their regional peers (Graph 2.1.10 and 2.1.11). Some of these companies also take
the opportunity to tap international and domestic capital markets ([10]). Consequently, competition between domestic banks has further
increased and has started to exert pressure on corporate lending rates, which
could adversely affect banks' net interest margins and future profitability.
 Graph 2.1.8:   Change in stock of domestic credit and contributions 
 Source: Bank of Slovenia. 
 Graph 2.1.9:   Credit growth — Total loans 
 Source: Bank of Slovenia. 
 Graph 2.1.10: Short-term interest rates (< 1 year) 
 Source: ECB. 
 Graph 2.1.11: Long-term interest rates (>1 year) 
 Source: ECB. 
The high debt leverage of the corporate
sector is adjusting, but profitability and creditworthiness of borrowers has
not yet significantly improved. The leverage
ratio ([11]) increased
from a moderate multiple of 4.8 before the crisis (2007) to its peak of 6.7 in
2009 (Graph 2.1.12), also mirrored by an increase in the
debt to total assets ratio. Deleveraging started in 2010 and has been
progressing since then, albeit in different stages, which has created three
different categories of debtors (Box 2.1.2). In 2010 and 2011, deleveraging was
mainly driven by market exits (bankruptcies or firm takeovers). Since 2012
financial liabilities of ongoing businesses have been declining (by EUR 0.4
billion in 2012 and by a further EUR 0.5 billion in 2013) ([12]). The reduction of financial liabilities in viable firms is
expected to have accelerated further in 2014 based on most recent data.
Nevertheless, profit margins have not improved since their collapse during the
crisis. This can be seen in terms of operational profitability (Earnings before
interest, taxes, depreciation and amortisation - EBITDA margin ([13])), indicating that the capacity of the corporate sector to generate
cash flows and repay debt has not yet fully recovered. It is also evident from
net profit margins, which remain squeezed due to high debt service costs (Graph
2.1.13).
 Graph 2.1.12: Indebtedness of the corporate sector 
 Source: AJPES, European Commission. 
 Graph 2.1.13: Cash flow capacity and profitability of the corporate sector 
 Source: the Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), European Commission. 
 Graph 2.1.14: Credit growth — corporate loans (incl. SME) 
 Source: Bank of Slovenia. 
 Graph 2.1.15: Credit growth — foreign loans 
 SID Banka not included Source: Bank of Slovenia. 
The three major state-owned banks are
particularly affected by the increased competition and the lack of good-quality
credit demand. While state-owned banks are bound by
the commitments stemming from the state aid restructuring procedures (i.e.
minimum return on equity (ROE) on new loans, maximum cost income ratio),
foreign-owned banks have more flexibility. As a consequence of the new risk
management policy of state-owned banks, loans to clients rated below B can in
practice only be provided if they are highly collateralised or secured with a
guarantee (e.g. by another bank, a parent company, a subsidiary or the state).
Various lending support schemes have been launched by SID Banka (the Slovenian
development bank) to enhance lending to SMEs, but few companies appear to meet
the criteria, so the funds remain largely undrawn (Section 2.3).
In the case of state-owned banks,
lending has focused on the roll-over of stocks related to restructurings, with
less new lending compared to foreign-owned banks
(Graph 2.1.16). One reason may be that the focus of
the domestically owned banks is the ongoing work-out of corporate NPLs which is
resource-intensive. A proportion of the new lending from foreign-owned banks is
not targeted at the local economy but is linked to the reduction of the
intra-group lending from their parent institutions (Graph 2.1.15). 
 Graph 2.1.16: New lending vs. prolongation 
 M — Major state-owned banks, O — Other domestic banks, F — foreign-owned banks SID Banka is not included Source: Bank of Slovenia. 
NPLs are still high compared to
pre-crisis level, despite the transfers made by banks to the BAMC. In November 2014, the volume and level of NPLs in the banking
system decreased to EUR 5.1 billion due to the transfer of NPLs to the BAMC and
now stands at 13.1% based on data provided by the Bank of Slovenia. 
Nevertheless, the major state-owned banks have systematically higher NPL ratios
than foreign-owned banks although the former have benefited from a transfer to
the BAMC (Graph 2.1.18). The continuing high volume of NPLs
in domestic banks (Graph 2.1.17) is the result of selective and only
partial transfer of NPLs to the BAMC, a deteriorating quality of the domestic
loan portfolio, the introduction of a stricter NPL definition (in line with EBA
guidance) and poor asset quality in the foreign direct lending portfolios
(which were not transferred to the BAMC). The increased restructuring efforts
will not immediately impact the NPL levels as key credit risk indicators will
only adjust once operational restructuring is implemented and this takes time.
In addition, restructured loans have to remain classified as NPLs for at least
one year after the restructuring is concluded. System-wide NPL ratios are also affected
by the contraction of new lending and the subsequent reduction of loan stocks,
particularly for banks that are winding down.
 Graph 2.1.17: NPLs by type of bank 
 Q4 14 contains data until November 2014. Source: Bank of Slovenia. 
 Graph 2.1.18: NPL ratios by type of bank 
 Q4 14 contains data until November 2014. Source: Bank of Slovenia. 
The majority of the NPLs are
concentrated in the domestic corporate loan book.
It is only in the state-owned banks and in the banks in wind-down that the
proportion of foreign corporate NPLs remains above 30% (Graph 2.1.19).  Foreign NPLs were not transferred
to the BAMC and constitute about 22% of the total remaining stock of NPLs in
all banks. They mainly consist of lending to companies outside Slovenia (mostly
ex-Yugoslav countries, Bulgaria, Romania) but also lending to subsidiaries of
the domestic banks in ex-Yugoslav countries, Bulgaria and Romania. Foreign NPLs
are diverse in terms of sector and size and are often based on bilateral
agreements. A systematic solution to restructuring these wide-ranging exposures
would therefore be challenging and resource-intensive.  
Coverage ratios close to 60% reinforce
the capacity of banks to absorb some losses from their NPL portfolios. The relatively high coverage ratios  show that the remaining stocks
of NPLs are better provisioned than in the past three years and therefore
should pose less of an imminent risk to the solvency of the banks (Graph 2.1.20). The large state-owned banks report
the highest coverage ratios, mainly due to supervisory actions taken by the
Bank of Slovenia.
 Graph 2.1.19: Structure of NPLs by bank (Q3 2014) 
 Source: Bank of Slovenia. 
Swift restructuring and work-out of the
NPLs is crucial for enhancing long-term profitability and viability of the
Slovenian banking system, boosting investment, strengthening domestic demand
and supporting economic recovery. Enhanced
cooperation amongst the different stakeholders, availability of working capital
financing and fresh equity for the companies undergoing restructuring are particularly
helpful for speeding up the work-out process. The BAMC and the bigger domestic
banks follow a long-term value-based approach to restructuring. Smaller
domestically owned banks which are in the process of winding down (Factor and
Probanka), as well as some of the foreign-owned banks which have started to
reduce their exposure to the Slovenian market, have a shorter time horizon and
seek a quick exit. This may present challenges when negotiating restructuring
plans for companies. The BAMC has no lending capacity and domestic banks are
reluctant or unable to provide working capital to companies undergoing
restructuring as they are constrained by stricter lending and risk management
policies. Alternative sources of financing like asset backed securities or
corporate bonds could be further developed (Section 3.3). Fresh equity needs to
be available to support deleveraging. Debt-to-equity swaps driven by the BAMC
will further increase the level of state ownership in the economy.
Privately-based structured solutions, such as the establishment of special
purpose vehicles (SPVs), could provide an alternative solution. The role of the
recently established corporate restructuring task force is to monitor and
coordinate the overall restructuring process and to provide the necessary
guidance and provide solutions to outstanding issues. 
 Graph 2.1.20: Coverage ratios by type of bank 
 Q4 14 contains data until November 2014. Source: Bank of Slovenia. 
Reinforcing long-term profitability and
reducing non-performing loans in the corporate segment are key to further
stabilising the banking sector. The ongoing
restructuring and rationalisation of the major state-owned banks provides an
opportunity to reduce the cost base in a sustainable manner. Furthermore, there
could be scope to increase the non-interest income of banks. Macro-prudential
measures introduced by the Bank of Slovenia (Box 2.1.1) are supposed to improve the quality of
lending activity, though it is still too early to assess the impact of these
measures. The swift restructuring of the corporate sector by making full use of
all existing tools, such as the BAMC and the new insolvency legislation, could
boost the recovery of the cash-flow capacity of the corporate sector, which is
an important prerequisite for enhancing the profitability of banks. 
Further consolidation and enhanced
corporate governance of the banking sector could be facilitated through the
continuation of the privatisation process. The
share of state-owned and state controlled banks in Slovenia has been high and
has increased even further after the crisis as a result of the banking sector
restructuring. More than 60% of Slovenian banks' assets are in the hands of
state-owned banks. As a result of weak corporate governance and
interconnectedness with other state-owned and state-controlled enterprises,
Slovenian state-owned banks suffered significant losses during the crisis and
experienced systematically higher NPL ratios compared to foreign-owned peers
(Graph 2.1.18). The rehabilitation of the banking
sector had important fiscal implications for Slovenia, amounting to more than
EUR 5.7 billion from 2007 to date (Section 2.2). Majority of these state
interventions were capital injections covering past losses with a direct
negative impact on both public debt and deficit (approx. EUR 4 billion), while
the remaining were linked to setting up the BAMC ([14]) (EUR 1.7 billion in equity and bonds). Although risk management in
state-owned banks has been improving over the past year, the state does not
have the same incentive structure, economies of scale and expertise (e.g. risk
modelling, IT, data collection) that a large international group can offer to
its subsidiaries. Slovenia has committed to reduce the share of state ownership
in the banking sector. Continuous progress in this area would further help to
halt the negative feedback loop between the sovereign and the banking system.
 Box 3.1.2: Structure of debtor companies liable for the NPLs  Three main categories of debtor companies liable for NPLs can be identified: The first category consists of construction and infrastructure companies, where bankruptcy rates have already peaked and most of the inefficient firms have exited the market. The majority of these exposures have been transferred to the BAMC and a large proportion of the losses have already been recognised by banks. The BAMC needs to enforce the collateral of these loans, realise any possible gains and complete the insolvency procedures. The recovery value obtained by the BAMC, and subsequently the state, will mainly depend on how efficiently the stakeholders and the courts manage the insolvency procedures. The second category consists of highly leveraged financial holdings, management buy-out companies and other highly leveraged medium-to-large size Slovenian companies. The latter include a small number (up to 100) that have a high value and are economically important (2014 in-depth review: approximately 90 % of debt carry-over is concentrated in just a handful of companies), which are mostly reliant on domestic demand, with some state-owned or state-controlled exporters as an exception (e.g. Cimos, Elan). In several cases, these companies have used a relatively large amount of (or exclusively) debt financing to acquire stakes in various businesses and have placed this debt on the balance sheet of the acquired companies. The subsidiary businesses are mostly domestically focused and many of them might have viable core activities. Many of the exposures in this category (both holdings and large companies) have been transferred to the BAMC, though some remain with the banks as a result of not having qualified for transfer. The BAMC and the corporate restructuring task-force should focus on swift financial and operational restructuring of viable companies, which will be crucial for the recovery of investment and of domestic demand in Slovenia. The third category includes NPLs of other large corporates and SMEs with sound core business activities but which, during the boom years, expanded their activities in non-core areas such as real estate or tourism. This category also includes suppliers to companies in the second category that have suffered from reduced orders. Some of the exposures in this category have been transferred to the BAMC, but most of them are still on the banks’ balance sheets, either because they did not qualify for a transfer (e.g. exposures were too small or still performing) or they are with banks that have not (yet) transferred assets to the BAMC. Due to their size, the work-out of many of these companies has yet to begin, and needs to be a priority of the ongoing restructuring efforts. There is more to be done here than in the case of the large companies and holdings, and this will most likely continue to take up significant management resources of the banks. 
The state involvement in the economy
remains high and it has incurred significant fiscal and economic implications
for Slovenia amounting to over EUR 13 billion since the onset of the crisis. The state is the largest employer, asset manager and corporate
debtor in Slovenia. State-owned enterprises and state-controlled enterprises
(SOEs/SCEs) ([15]) employ one
fifth of the employees working in non-financial companies (NFCs), and hold
approximately one third of the total corporate assets and the total outstanding
corporate debt. In the period from 2007 to 2013 SOEs/SCEs significantly
underperformed compared to their privately owned peers in terms of productivity
and profitability at both national and peer country level. Negative spill-overs
from the high level of state involvement in the economy and inefficient
corporate governance in SOEs/SCEs distort resource allocation, harm the
business environment and hamper private investment and growth. As a result, the
corporate sector remains undercapitalised and the resolution of NPLs is
progressing slowly, which in turn delays recovery in the banking sector. This
section analyses the complex nexus of state-owned banks, insurance companies
and NFCs and the impact on the Slovenian economy.
Importance of SOEs and SCEs in the Slovenian
economy
A complex network of directly and
indirectly state-owned or state controlled banks, NFCs, insurance companies and
investment funds continues to weigh on the economy.
At the end of 2014, 642 SOEs/SCEs were identified as linked to the state via a
complex cross-ownership structure. State control is exercised in several ways.
Most of these 642 companies (62% in terms of book value of assets) are directly
controlled by the Republic of Slovenia, through a single entity – the Slovenian
Sovereign Holding (SSH), or quasi-directly through the municipalities or the
various state management funds (KAD, PDP, DSU, Modra Zavarovalnica) ([16]). The SSH was recently established (2014) with the aim of
consolidating and managing all state assets under one structure, and allowing
for the privatisation of some of these assets. Another 32% are indirectly
controlled through the BAMC, the banks, the insurance companies, and other
financial companies which are all fully and directly owned by the Republic of
Slovenia. While the corporate restructuring is ongoing, the state influence in
this category of indirect ownership is likely to increase further through
debt-to-equity swaps in the banks and the BAMC. The remaining 6% of
SOEs/SCEs are controlled through other SOEs/SCEs and their subsidiaries (Table 2.2.1). 
The state is the largest asset manager
and corporate debt holder in Slovenia. Although
SOEs/SCEs represent only about 1% of the total number of companies in Slovenia,
they are highly significant from an economic perspective ([17]) and are bigger in size compared to their privately owned peers
(Table 2.2.2). SOEs/SCEs account for one third of
the assets, a quarter of the value added, over 40% of the equity value and one
third of the financial debt obligations of NFCs. SOEs/SCEs presence is
particularly strong not only in transport, energy and public utilities, but
also in other sectors where state involvement is less pronounced in peer
countries (Graph 2.2.1) such as consumer staples, chemical
industry, manufacturing, tourism and leisure ([18]). The state is the largest corporate debt holder in Slovenia
through its prevalent ownership of the banking system (direct owner of more
than 60% of the banking assets as of end 2013). The state also manages 88%
of the pension assets and 60% of all insurance liabilities. In various cases,
the state is present as both an equity and debt holder. The conflict between
the two mandates in particular in distressed companies requires coordination in
order to minimise the risks and maximise the returns for the state. 
 Table 2.2.1:     The network of state ownership and state control in Slovenia 
 Source: Chamber of Commerce of Slovenia, European Commission. 
 Graph 2.2.1:   Share of SOEs/SCEs in sectoral value added (as % of total sectoral value added), 2013 
 Source: Orbis database and European Commission calculations. 
One third of the workforce in Slovenia
is employed by the state. SOEs/SCEs employ one
fifth (19%) of all the workers in NFCs (approximately 80 000), and roughly
additional 15 000 employees in the financial sector. Together with the 160 000
employees in the public sector, this amounts to 33% (approximately 255 000) of
total employment in Slovenia (Graph 2.2.2). 
 Graph 2.2.2:   Employment, 2013 – public, private and SOEs/SCEs            
 Notes: The employment data for SOEs/SCEs includes the total number of employees in these companies without applying the proportion corresponding to the share of state ownership.  Source: National Statistical office of Slovenia, The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), European Commission calculations.  
 Table 2.2.2:     Relative importance of SOEs/SCEs (as % of total NFCs) 
 Note: The table covers only 561 out of the total 642 companies as it excludes the banks, financial services, insurance and asset management companies (27), as well as companies in insolvency (27), newly established companies in 2014 (26) and one other company for which financial accounts were not available. The importance of state ownership in the banking sector is described in Section 2.1. Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Chamber of Commerce of Slovenia, European Commission. 
 Graph 2.2.3:   Book value of equity of SOEs/SCEs in Europe (as % of GDP) 
 Source: 2012 OECD data on size and sectoral distribution of SOEs, European Commission calculations. 
The level of state involvement in
Slovenia is amongst the highest in Europe. The book
value of equity of SOEs/SCEs relative to GDP (Graph 2.2.3) is the highest in Europe if majority
state-owned companies (over 50%) are taken into account and the second highest
if minority stakes are also included (between 10% and 50%), while their share
in terms of employment is the third highest in both cases (Graph 2.2.5). According to a set of OECD soft
indicators ([19]), the extent
to which the state owns, controls, or is involved in business in Slovenia
(state control) is above the average in the EU or in Slovenia's Central and
Eastern European (CEE) peers (Graph 2.2.5), particularly when it comes to
government involvement in the network industries (equity shares in electricity,
gas, rail, transport, air transport, postal services and telecommunications).
Slovenia scores second worst in terms of involvement of the state in business
operation (the extent and type of price controls and regulation) and the use of
command and control regulation by the government (the extent to which
government uses coercive as opposed to incentives based regulation in general
and in specific sector, such as road freight, retail trade, air transport,
railways, professional service). Moreover, free market principles such as price
liberalisation and competitive decision-making based on incentives appear also
to be distorted relative to peers. 
 Graph 2.2.4:   OECD indicators for product market regulation (2013) 
 Source: 2013 Indicators of product market regulation compiled by OECD. The graphs display different indicators (meaning described in the title of the graphs) on a scale from 0 – least restrictive state involvement/ control, to 6 - most restrictive state involvement/ control. 
 Graph 2.2.5:   Employment at SOEs/SCEs in Europe (as % of total employment) 
 Source: 2012 OECD data on size and sectoral distribution of SOEs, European Commission calculations. 
SOEs/SCEs' financial performance and productivity ([20])  
SOEs/SCEs in Slovenia continue to be
highly leveraged and many of them remain at risk of default. The debt leverage of SOEs/SCEs has been higher than the debt
leverage of all corporates since the onset of the crisis (Graph 2.2.6). Based on aggregated data, the
leverage ratio ([21]) of
SOEs/SCEs stood at 7.2 in 2013, above the 6.1 average for all corporates. More
significant differences in the debt leverage of SOEs/SCEs emerge at sector
level. In 14 sectors out of 22 SOEs/SCEs are highly leveraged (Table 2.2.2). Particularly exposed are companies
in the mining, apparel & wood production, real estate and financial
services sectors ([22]), as their
operating profit ([23]) has been
negative for a prolonged period and hence they are at risk of default.  
 Graph 2.2.6:   Leverage ratio of SOEs/SCEs and all NFCs (excl. energy and public utilities sectors) 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Chamber of Commerce of Slovenia calculations. 
Based on aggregated industry data from
company accounts in 2013 SOEs/SCEs generated net losses in certain sectors. On average SOEs/SCEs posted weaker financial results mainly due to
the higher net financial losses resulting from the impairments of their
non-core assets (e.g. stakes in non-core subsidiaries). Gross losses were
concentrated in the financial services and the metal processing industries and
accounted for 64% of the total losses generated by SOEs/SCEs. Gross profits
were mainly generated by the energy, chemical industry, and transport &
storage industries (70% of total profits of SOEs/SCEs). 
 Graph 2.2.7:   Profitability (ROCE) of SOEs/SCEs and foreign-owned companies relative to domestic privately owned companies (2004-2013 average) 
 Source: Orbis database and European Commission calculations. 
Compared to their privately owned peers
in Slovenia and in other CEE countries, SOEs/SCEs are less efficient in
deploying their resources (capital employed). In
2013, profitability of SOEs/SCEs in terms of return on equity (ROE) ([24]) and return on capital employed (ROCE) ([25]) was lower than that of their privately owned peers – both domestic
and foreign-owned. Taking profitability of domestic privately owned companies
in Slovenia as a benchmark, SOEs/SCEs underperform, while foreign-owned
enterprises outperform in some sectors (Graphs 2.2.7 and 2.2.8). Relative to SOEs/SCEs in most other
CEE countries, Slovenian SOEs/SCEs also underperform on the basis of
industry-level comparison in all sectors except for energy (Graph 2.2.8). 
SOEs/SCEs are amongst the companies with
the highest debt leverage relative to peers in Slovenia and in other CEE
countries. SOEs/SCEs are more indebted than their
privately owned peers in almost all sectors apart from the chemical and
pharmaceutical sector. Foreign-owned enterprises on the contrary are less
indebted than domestic privately owned companies in Slovenia in all sectors
reviewed (Graph 2.2.9). Slovenian SOEs/SCEs appear to be
more indebted relative to the SOEs/SCEs in most other CEE countries, based on
industry-level data (Graph 2.2.9). 
 Graph 2.2.8:   Profitability (ROE) of SOEs/SCEs and foreign-owned companies relative to domestic privately owned companies (2004-2013 average) 
 Source: Orbis database and European Commission calculations. 
SOEs/SCEs are less productive than their
peers in Slovenia and in other CEE countries. Based
on total factor productivity (TFP) estimations ([26]) for SOEs/SCEs and foreign-owned companies in Slovenia, relative to
domestic privately owned companies, underperformance of SOEs/SCEs is observed
in the majority of the sectors (Graph 2.2.10).
 Graph 2.2.9:   Leverage ratio of SOEs/SCEs and foreign-owned companies relative to domestic privately owned companies (2013) 
 Source: Orbis database and European Commission calculations. 
Given that SOEs/SCEs account for a large
proportion of sectoral value added in some of these sectors (e.g. the chemical
industry and postal services & ICT as described in Table 2.2.2), underperformance of those
enterprises can have substantial economic repercussions. 
 Graph 2.2.10: Total factor productivity of SOEs/ SCEs and foreign-owned companies relative to domestic privately owned companies (in %), 2004-2013 average 
 Source: Orbis database and European Commission. 
 Graph 2.2.11: Profitability (ROE) of SOEs/ SCEs by sector in Slovenia and other CEE countries (aggregate), 2013 
 Source:  Orbis database and European Commission calculations. 
Foreign-owned companies in Slovenia seem
to be more efficient and competitive than SOEs/SCEs. While labour productivity of SOEs/SCEs seems to be lower than
among  foreign-owned peers in most of the sectors examined, apart from tourism
and other services (Graph 2.2.14), the costs of labour per head are
higher than those paid by private peers and similar to those paid by foreign
companies (Graph 2.2.12). This indicates lower efficiency and
competitiveness of SOEs/SCEs relative to their foreign-owned and privately
owned peers.
 Graph 2.2.12: Costs per employee of SOEs/ SCEs and foreign-owned companies relative to domestic private owned companies (2004-2013 average) 
 Source: Orbis database and European Commission calculations. 
 Graph 2.2.13: Debt leverage ratio of SOEs/SCEs in Slovenia and other CEE countries (2013) 
 Notes: Due to negative value of the denominator (EBITDA) the estimates for Romania and Bulgaria are not relevant. Source:  Orbis database and European Commission calculations. 
 Graph 2.2.14: Labour productivity SOEs/ SCEs and foreign-owned companies relative to domestic privately owned companies (in %), 2004-2013 average 
 Source: Orbis database and European Commission calculations. 
Fiscal and economic implications of state
ownership in Slovenia 
The total fiscal and economic
implications of state involvement in the economy for the period 2007-2014 are
estimated at over EUR 13 billion or just over one third of 2013 GDP. The total fiscal and economic implications of SOEs/SCEs is
considered as the sum of a number of transactions estimated in the following
categories: (i) state interventions related to the rehabilitation of the
banking sector ([27]), (ii)
foregone profits of SOEs/SCEs when compared to overall profitability achieved
for all NFCs by sector ([28]), (iii)
subsidies paid by the state to companies which either became insolvent, or need
external support to maintain operational profitability, (iv) equity increases
of SOEs/SCEs paid directly by the state, (v) drawn guarantees, and (vi) debt
assumptions by the state. The potential future fiscal implications stemming
from the drawing of outstanding guarantees and other contingent liabilities are
not included in the number. While by far the largest portion of the costs is
due to financial sector stabilisation measures (44% of total and 16% of GDP),
considerable amount was also associated with wider economic implications in
terms of foregone profits of SOEs/SCEs compared to their private peers (38% of
total and 14% of GDP). The former has no direct impact on public finances and
is estimated just to demonstrate the amount of lost value added for the state
and the economy. EUR 8.3 billion (62% of the total and 22% of GDP) have direct
budgetary impact – either through increase of government deficit, debt or both
in most of the cases (Table 2.2.3). 
 Table 2.2.3:     Total fiscal and economic implications of financial and non-financial SOEs/ SCEs 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations, European Commission calculations. 
One third of the increase of public debt
from 2007 to 2014 can be attributed to state interventions related to financial
and non-financial SOEs/SCEs. Slovenia's gross
consolidated government debt almost quadrupled from 2007 to 2014 (from EUR 7.9
billion to EUR 30.3 billion at the end of 2014). In terms of GDP it increased
from 22.7% to 82.2%. One third of this increase (EUR 8 billion or 21 percentage
points) was due to costs related to SOEs/SCEs,  such as capital injections,
debt forgiveness, and drawn guarantees, as well as EUR 1.5 billion of BAMC
bonds issued to enable the transfer of NPLs to the BAMC (Graph 2.2.16). In addition, government deficit was
also negatively impacted, particularly by the recapitalisations of the
state-owned and state-controlled banks during the crisis (Graph 2.2.15). 
SOEs/SCEs continue to pose considerable
fiscal risks. About EUR 6.4 billion of contingent
liabilities to the state budget are currently outstanding in the form of
guarantees (18% of 2013 GDP). The significant state involvement in the economy
in terms of SOEs/SCEs' high share in total assets, equity and liabilities of
the corporate sector, particularly in the banking and insurance sector,
increase the risks to public finances in the future.
 Graph 2.2.15: Total government deficit and deficit increasing state interventions related to SOEs/SCEs 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations, European Commission. 
A large part of the profitability of
SOEs/SCEs and the corporate sector as a whole is supported by soft budget
constraints ([29]) in the
form of subsidies. The Slovenian economy is
increasingly supported by various forms of subsidies, which is a source of
moral hazard at management level and may adversely distort decision-making in
companies, particularly decisions related to investment. In the period
2007-2013 the inflow of subsidies to the corporate sector amounted to
approximately EUR 400 million per annum. In several sectors, the proportion of
subsidies is greater than 20 % of operating profits (EBITDA). These sectors are
agriculture (50%), mining (78%), public utilities (26%), media (60%) and public
administration, education and health (21%). SOEs/SCEs received one third of all
subsidies in 2013. One of the main beneficiaries of the subsidies was the Slovenian
Railway holding (accounting for approximately 50% of all subsidies). 
 Graph 2.2.16: Total government debt and debt increasing state interventions related to SOEs/SCEs 
 The graph assumes that debt is issued in the same year as interventions take place. Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations, European Commission. 
 Graph 2.2.17: Subsidies to all NFCs relative to operating profit (EBITDA) and share of subsidies to SOEs/ SCEs 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations. 
Soft budget constraints combined with a
limited strategic and financial management capacity have distorted resource
allocation and negatively affected the profitability of SOEs/ SCEs. In line with the higher debt leverage, capital expenditure at
SOEs/SCEs was higher than at all corporates (Graph 2.2.19) relative to both operating profit
and sales. This should have translated into higher profitability of SOEs/SCEs
compared to all corporates. Instead, available financing has been channelled to
unproductive investments – i.e. less profitable (or loss-making) non-core
activities as evidenced by the higher proportion of non-core assets on the
balance sheet of SOEs/SCEs compared to private peers (Graph 2.2.18). As these investments are less
profitable than the core activities of the parent company, the overall
profitability (ROE) is negatively affected through the impairments of these
non-core assets. The highest level of non-core investment of SOEs/SCEs is in
financial and insurance activities, which includes financial holding companies,
in professional, scientific and technical activities, and in consumer staples
and retail.
 Graph 2.2.18: Other fixed assets of SOEs/ SCEs and foreign-owned companies relative to domestic privately owned companies (as % of total assets ), 2004-2013 average 
 Note: Other fixed assets are balance sheet items, which include investments in financial assets, not related to the core business of the company and loans to subsidiaries.   Source: Orbis database and European Commission calculations. 
SOEs/SCEs Corporate governance framework and
privatisation in Slovenia 
Sound management and enhanced corporate
governance policies for SOEs/SCEs can assist in mitigating the risks of future
state support on public finances. The level of
state support provided to SOEs/SCEs in Slovenia has been considerably above the
EU average in recent years. SOEs/SCEs have commenced the deleveraging of
non-core assets accumulated during the boom, which will weigh on their
profitability in the coming years. In parallel to addressing these legacy
issues, the focus should shift to enhancing the core business of SOEs/SCEs and
identifying sectors where state involvement is not necessary. Slovenia could
further benefit from the strong momentum and return of confidence after the
restructuring of the banking sector in 2013 and 2014 in order to accelerate the
privatisation process.
A new corporate governance code for SOEs/SCEs
was adopted in December. The new framework is
reportedly in line with the basic recommendations of international practice in
that it (i) ensures that SOEs/SCEs and private companies operate on an equal
footing (ii) enhances the separation of the functions of the state from its
capacity as an owner (iii) applies across the spectrum of SOEs/SCEs (with
limited exceptions) under the 'comply or explain' principle (iv) reinstates the
roles of the company bodies, in particular the supervisory board, and the
company's position as regards the different stakeholders, (v) realises the
principles of transparency and touches upon a number of long-standing issues
such as the remuneration and bonuses of the company boards. Contrary to its
predecessor, the new code does not exclude the parallel application of other
corporate governance frameworks (e.g. that of listed companies), thus
eliminating the cases of privileged or otherwise differentiated treatment of
SOEs/SCEs in comparison with privately held companies. Finally, corporate
governance of SOEs/SCEs is explicitly connected to the goals of the forthcoming
strategy on state assets, which will ensure consistent treatment of SOEs/SCEs.
 Graph 2.2.19: Capital expenditure relative to operating profit (EBITDA) of SOEs/ SCEs and all NFCs 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations. 
The Slovenian Sovereign Holding (SSH),
in charge of the management and divestment of state assets is fully operational
but its asset management strategy is still to be approved. In June 2014, the ex-SOD fund was transformed into SSH following
the amendment of its articles of association, in accordance with the new law
adopted in late March 2014. In order to fulfil its mandate, SSH requires a
strategy reflecting the country's objectives and specifying the classification
of state assets in strategic, important and portfolio investments. The
statutory deadline laid down in the law for the government to table its
proposal in parliament for that strategy and for a new supervisory board for
SSH (July 2014) has passed. A plan for a new privatisation cycle, expected by
November 2014 is also missing in the absence of the strategy. A draft strategy
entered intergovernmental consultations in January 2015 and is expected to be
approved by the Parliament in March 2015. Within one month of the strategy
being adopted, SSH will set up the annual asset management plan, which will
include the new divestment schedule for additional state assets. A new
supervisory board is expected to be appointed by the Parliament in the coming
months after the Ministry of Finance completes the evaluation of the candidates
in February 2015. A number of measures have been taken to make SSH operational,
such as the adoption of an asset management policy in December 2014, which
establishes the principles and operational procedures of the SSH. Other
functional aspects regarding the establishment of the SSH, e.g. required
corporate transactions and legal transformations provided for in the law, are
also on track.
Slovenia could further benefit from the
strong momentum and return of confidence after the restructuring of the banking
sector in order to accelerate the privatisation process. The privatisation programme is slowly progressing. A list of
fifteen companies was compiled in 2013 for a first cycle of expedited
privatisation, out of which three companies have been divested through
privatisation and one company has been acquired by its creditors through a
debt-to-equity swap executed as part of the restructuring process. Amongst the
companies that were privatised, the sale of the airport, Aerodrom Ljubljana,
was the largest transaction and was completed in October 2014. The sale process
for the biggest assets on the list, Telekom Slovenije (the largest telecom and
the sole owner of the telecommunication   network in Slovenia) and NKBM (the
second largest bank, owning 11% of total banking assets) is ongoing, albeit
with some delays, and is expected to be concluded in April and March 2015
respectively. 
The asset management plan could enhance
the transparency and credibility of the privatisation process. As Slovenia prepares a new cycle of privatisations it is important
that the list of companies is consistent with the SSH's priorities and
strategy. The privatisation of selected SOEs/SCEs in a transparent manner can
assist in attracting FDI, and improve the outlook for the Slovenian economy.
Furthermore, any proceeds from the process can assist in reducing public sector
debt and enhancing the future sustainability of debt. 
Price and cost competitiveness
Since 2013, Slovenia has been performing
relatively well on external markets, reflecting recent competitiveness gains. While some external price and cost competitiveness has been lost
due to wage increases between 2008 and 2010, the most recent data and a new
sectoral Real Effective Exchange Rate (REER) database show relatively positive
competitiveness trends, mainly owing to REER depreciation in the tradable
sectors.
The moderation in prices and costs after
2012 has contributed to Slovenia’s improved export performance. The traditional indicator of price and cost competitiveness at the
macroeconomic level, REER deflated by unit labour costs in total economy, shows
a steady retreat from the significant appreciation between 2007 and 2010 (Graph
2.3.1 – left). The appreciation suggested a substantial loss in cost
competitiveness, which may have been partly reflected in the loss of market
share in the period 2009-12. The subsequent REER depreciation could partially
explain the improvement in Slovenia’s export performance since 2013, as
competitiveness shifts tend to have a lagged effect on trade performance.
Rapid aggregate wage growth coupled with
stagnating productivity and labour hoarding had previously contributed to
generating imbalances. While part of the REER
appreciation was due to rapid wage growth, the surge in the trend in 2009 was
largely caused by an unexpected drop in production and a resulting decline in
productivity per employee. Collapsing economic activity combined with labour
hoarding as workers were kept on the job through work support schemes weighed
heavily on firms’ profitability, mainly in the non‑tradable sectors. The
tradable sectors adjusted quickly so as to safeguard their competitiveness. For
example, REER based on the unit labour cost in the manufacturing sector has
remained broadly stable over the last 15 years (Graph 2.3.1 – right). 
A measure of competitiveness based on
sectoral unit labour costs provides a more granular representation of
competitiveness developments. It shows that
Slovenia made considerable gains in price and cost competitiveness in the
pre-crisis period but confirms deterioration in competitiveness in the run-up
to the crisis that is now reversing (Graph 2.3.2). This new REER indicator aggregates
competitiveness at sectoral level to obtain an economy-wide measure of
competitiveness, which captures heterogeneous dynamics among sectors. It
controls for the main limitation of the traditional REER, which confounds
changes in the sectorial structure with changes in the unit labour cost per
sector and does not account for the influence of global technological
developments on different sectors.
 Graph 2.3.1:   Real effective exchange rate deflated by ULC in total economy (ULCE) and in manufacturing (ULCM) 
 Index 2000 = 100 Source: European Commission. 
 Graph 2.3.2:   REER (ULCE) and new sectoral REER in Slovenia 
 Index 2000 = 100 Source: European Commission. 
Slovenia's cost competitiveness has
evolved more favourably than that of most of its peers (Graph 3.3.3). While this new indicator ([30]) is available only until 2011, it is expected to have further
improved beyond this horizon as a result of favourable productivity
developments and very limited wage growth since 2011. In addition, Bank of
Slovenia ([31]) estimated
an equilibrium competitiveness indicator based on unit labour costs for
Slovenia vis-à-vis EA-12 and compared it with those of its main trading
partners. According to this indicator based on unit labour costs, price and
cost competitiveness has substantially improved since 2010. A recent extension
of this analysis confirms that the competitive position of Slovenia returned to
equilibrium in 2014.
The Nominal Unit Labour Cost (NULC)
index is once again approaching the euro area average (Graph 2.3.4). This follows a period of decoupling
due to the acceleration in wage growth at a time of no additional productivity
gains. The three years (2008-10) with flat hourly productivity and growing
wages adversely impacted on Slovenia’s price and cost competitiveness vis-à-vis
the euro area. Nevertheless, Slovenia’s NULCs still grew slower than those of
most of its peers.
 Graph 2.3.3:   Sectoral REER aggregate in SI and V4 
 Index 2000=100 Source: European Commission. 
 Graph 2.3.4:   Nominal Unit Labour Cost 
 Index 2002 = 100 Source: European Commision. 
While NULCs in the tradable sectors
adjusted quickly and safeguarded their competitiveness, the adjustment in the
non-tradable sectors started later and is taking more time. Non-tradable sectors (real estate activities, construction, public
administration, defence, education and health, and scientific, administrative
and support services) were the main contributors to the increase in the NULC
but they have very little impact on the external competitiveness of the
Slovenian economy. Developments in the tradable sectors were more favourable
also compared to the peers and the euro area. Increases in productivity and
wages in the tradable sector (until 2007) inevitably translated into increases
in wages in the non-tradable and less productive sectors; this fuelled
inflation and led to an accelerating NULC. Such an evolution is part of the
convergence process and is in line with the Balassa-Samuelson effect (Graph 2.3.5). The protracted correction of unit
labour costs in the non-tradable and protected sectors could pose certain risks
whereby their higher costs filter through to the tradable ones and affect their
external competitiveness. These risks are present in particular during boom
periods. 
 Graph 2.3.5:   SI NULC in tradable and non-tradable sectors 
 Tradable sectors ISIC A, C, G-I, J. Index 2000=100 Source: European Commission. 
Slovenia’s labour productivity continues
to grow faster than the EU average (Graph 2.3.6). Productivity gains were achieved
mainly in the tradable sectors. By composition, they are positively reflected
in the recent trends in unit labour costs. Productivity measured in terms of
GDP per hour worked improved continuously over the last decade with the
exception of stagnation around the crisis years. Although productivity per
person employed dropped in 2009 as production contracted during the crisis,
growth of productivity per hour worked remained broadly in line with its
Visegrád 4 peers both before and after the crisis and consistently considerably
outpaced than the EU and euro area averages. Labour productivity per hour
worked provides a better picture of productivity developments in the economy,
as it eliminates differences in the full-time/part-time composition of the
workforce across countries and years (it eliminates the impact of the
widespread use of short-time work support schemes during the crisis in
Slovenia, whereby headcounts were maintained but hours worked decreased).
 Graph 2.3.6:   Productivity per hour worked 
 Index 2000=100 Source: European Commission. 
Recent wage growth has been moderate and
supportive of competitiveness (Graph 2.3.7). Even though wage growth
significantly outpaced the EU and euro area average between 2000 and 2008, it
remained broadly in line with productivity developments and the need for
convergence. The main notable exceptions are the high increases in 2008,
partially attributable to the payment of wage disparities in the public sector
and the indexation of wages to relatively high inflation in the previous year;
and in 2010, resulting from a large increase in the minimum wage.
While still comparatively high, recent
growth of the minimum wage has been limited. The
level of the minimum wage in relation to average gross monthly earnings remains
the highest in the EU. This is partly due to the design of the minimum
wage-setting system, which includes various allowances (e.g. for night work,
overtime) and a global indexation encompassing all of these components and not
just basic pay. In addition, since 2008 the minimum wage increased by 33% while
the gross wages per employee by 9%. The short distance of the minimum wage from
the average wage is also related to the low level of wage dispersion in the
country. ([32]) In 2014 the
minimum gross wage was EUR 789.15, having grown by 0.7% from the previous year,
while the ratio of the minimum wage to average gross monthly earnings was
51.4%, the highest in the EU. This is also reflected in high relative labour
costs for minimum wage workers that may relate to the low employment level of
the least skilled workers (Section 3.2). ([33]) In January 2015, the minimum wage was increased by 0.2%. In the
future, the ratio between the minimum and the average wage is expected to
decrease.
 Graph 2.3.7:   Nominal compensation per employee 
 Source: European Commission. 
There have been some changes to the
wage-setting system, yet excluding the minimum wage. The Social Agreement, which the new government signed with the
social partners in January 2015, will be valid until 2016. The agreement
establishes collective agreements as the basis for private sector wage setting,
while inflation and a share of sectoral productivity will be taken into account
in bipartite wage negotiations. The Social Agreement also indicates that public
sector wage growth has to lag behind private sector wage growth.  It does
however not involve any change to the setting of the minimum wage. A
contribution to the continuity of wage moderation comes from further reductions
in the public wage bill, adopted in December 2014 following an agreement
between the government and trade unions. The agreement extends to 2015 the
savings measures adopted in 2012 and 2013, and also introduces additional
measures. In 2013, the total paybill in the public sector decreased by 4.1%
compared to 2012 and the number of people employed in the public sector fell by
1.5%. According to the first estimates of the government, an additional EUR 36
million in savings, including reduced performance bonuses, could be achieved in
2015 with respect to 2014.
Non-cost competitiveness
Price and cost competitiveness can only
partially explain export performance. There is evidence that non-price factors
are very important, particularly in countries that have been through a real
convergence process. These factors include product
and geographical specialisation, developments in quality of products, notably
through research and innovation processes, consumer preferences in the
importing countries, as well as the ease of doing business (efficiency of
public administration, taxation policies, regulation, capital and labour market
conditions, access to finance and investment, etc.)
Trade developments in Slovenia have been
largely driven by its geographical and product specialisation (Graph 2.3.78). Slovenia’s exporters enjoyed
particular geographical advantages before 2008, as their target markets were
dynamic at the time (mainly euro area and Balkans). They also managed to gain
significant market share in new products. Nevertheless, with the onset of the
crisis, Slovenia lacked the necessary dynamism to enter new markets and lost
market share. Since 2013, Slovenia has managed to regain market share as well
as benefit slightly from the geographical orientation. Overall product
specialisation has been slightly negative or neutral. 
 Graph 2.3.8:   Geographical and sectoral composition of nominal rate of change of goods exports 
 Source: European Commission. 
The composition of Slovenia’s exports
has improved in the last decade. The proportion of
high-technology products in Slovenia's exports has progressively increased
(Graph 2.3.9). This indicates that Slovenian
exports are able to compete in the segment of higher value added products as
the quality of exports has been improving over time.
An increase in the technological content
and quality of exports has boosted export performance. The quality of exports has been improving relative to other trading
partners. Slovenia’s quality index (Graph 2.3.10) estimates how Slovenian exports
compete on the EU market relative to the exports of other Member States. The EU
market captures more than 75% of Slovenian exports, thus it is important to
benchmark how well these products are accepted compared to the exports from
other Member States. The quality index of Slovenia has been improving since
2006. However it remained below the physical unit labour cost (the share of
unit labour cost required to produce the value of exports) until 2012. A
discrepancy between the physical unit labour cost and the quality index
appeared in 2010, when the minimum wage increased substantially. Since then the
physical unit labour cost has moderated and adjusted to the quality of exports.
 Graph 2.3.9:   Density distributions of exports by quality 
 Source: European Commission, Orbis, COMEXT. 
 Graph 2.3.10: Non-cost competitiveness vis-à-vis EU28 
 Source: European Commission, IPTS institute, COMEXT. 
Non-cost competitiveness could improve
further through productive investment in innovative technologies and products. The forthcoming Smart Specialisation strategy (Section 3.3) could
serve as a platform for channelling EU funds into further improvement of non-cost
competitiveness.  Also, the current business environment needs to adjust to
support competitiveness improvements. Major weaknesses stem from the
developments in the financial sector, the slow privatisation process, lengthy
administrative procedures and the risk of corruption (Sections 3.3 and 3.5).
Investment dynamics
Private investment decreased
dramatically in 2009/2010 and since then it has not recovered (Graph 2.3.11). This is not only due to the crisis,
but also because of the highly indebted corporate sector, significant state
involvement in the economy, and an unsupportive business environment.
Companies, struggling to repay their debts, have been underinvesting compared
to the historical average and peers in the region. Weakness in investment
warrants special attention not only because of the impact on domestic demand
and short-term economic outlook but also because shortfalls in investment are
detrimental for the future potential growth of the Slovenian economy.
 Graph 2.3.11: Investment in the private sector 
 Source: European Commission. 
The magnitude of the drop in investment
is not in line with the development observed in aggregate demand. While domestic and external demand fell considerably during the
crisis, neither private consumption nor exports decreased as much as investment
(Graph 2.3.12). Despite rising unemployment and
wage restraint in the post-crisis years, private consumption modestly increased
in nominal terms and is projected to grow in the short term. Exports contracted
in 2009 but grew thereafter, yet this has not led to a significant pick-up in
investment among the exporting companies. Private investment remains 40% below
its pre-crisis peak ([34]) and is
projected to increase only marginally by 2016. This creates substantial
macroeconomic costs. Through its direct impact on aggregate demand, lack of
investment translates into reduced GDP growth. In addition, such development
considerably reduces Slovenia's ability to grow in the medium and long term.
 Graph 2.3.12: Private investment and private consumption 
 Source: European Commission. 
Low investment has eroded Slovenia's
potential growth. The Commission’s estimates for
the euro area indicate that a 5 percentage point reduction in the investment
rate leads to a reduction in potential growth of nearly 0.5%. Slovenia’s
potential output has substantially dropped since 2009 (Graph 2.3.13). The Commission estimates potential
growth in 2014 at ½%, compared to 3-4% between 2000 and 2008. This is primarily
due to a large reduction in the contribution from capital accumulation, and
secondarily due to lower total factor productivity. While Slovenia’s potential
growth is projected to gradually recover, it is expected to remain at a
relatively low level over the medium term, restrained by protracted low capital
accumulation as well as sluggish total factor productivity (TFP). TFP growth is
an essential driver of long-term growth, capturing efficiency gains in the
overall use of economic resources and reflecting technological progress
reflected in capital. In 2014, the TFP contribution was estimated to be
approximately 70% lower than the 2000-2008 average. As an ageing population is
expected to have a negative impact on potential growth, an increase in capital
accumulation and productivity growth is crucial in order to return to a higher
long-term growth path.
 Graph 2.3.13: Potential output and components 
 Source: European Commission. 
The crisis turned corporations from net
borrowers to net lenders, reflecting the deleveraging needs of corporates. Prior to the crisis, non-financial corporations relied on foreign
credit to finance their investment. Graph 2.3.14 shows a steady net borrowing level
until 2003, followed by a considerable accumulation of debt. The necessary
adjustment took place afterwards, but as of 2012 the investment rate fell below
the savings rate, making Slovenian companies net savers. This reflects the
ongoing deleveraging (scene setter and Section 2.1) and is mirrored in the
growing current-account surplus (Graph 1.5).
Construction investment accounted for
most of the decline in gross fixed capital formation but productive investment
was also affected (Graph 2.3.15). Slovenia experienced a non-residential
construction investment boom, mostly in infrastructure, retail, and tourism,
which ended abruptly in 2009. While the construction sector appears
overinflated before the crisis, its post-crisis activity and investment has
been extremely low. Peak-to-trough decline in employment in this sector was 30%
(2009-2014) and is stabilising only now. Peak-to-trough decline in construction
investment was close to 50% (2008-2012). Productive investment in machinery and
equipment shrank by a third between 2008 and 2010, but grew again in 2011 and
2013.
 Graph 2.3.14: Non-financial corporations savings and investment 
 Source: European Commission, ESA 2010; * 2014 based on quarterly data. 
 Graph 2.3.15: GFCF by type 
 Source: European Commission. 
Both households and non-financial
corporations reduced their investment significantly at the onset of the crisis,
while public investment was reduced at a later stage due to fiscal
consolidation (Graph 2.3.16). Non-financial corporations and
households sharply reduced their investment in terms of GDP by almost 40%
between 2008 and 2009. Government expenditure on investment continued to grow
until 2009, but as the recession took hold and revenue shortfalls materialised
public investment was targeted as a key measure of the required fiscal
consolidation.  Public investment declined by 22% between 2009 and 2012 and
this contraction dampened the tentative export-led recovery experienced by
Slovenia in 2010-11. Since 2012, there has been a significant increase in
public investment due largely to EU co-financed projects and the 2015
deadline for drawing on funds from the EU 2007-2013 multiannual financial
framework. Consequently, public investment amounted to over 5% of GDP in 2014,
one of the highest levels in the EU. Strong public investment has been one of
the key drivers of the economic recovery experienced in Slovenia in 2014 and it
is expected to continue to grow in 2015, albeit at a more modest pace.
 Graph 2.3.16: Investment by institutional sector 
 Source: European Commission. 
High corporate indebtedness, the need to
deleverage, regulatory bottlenecks and persisting uncertainty appear to have
been the main drivers of underinvestment.
Underinvestment in the private sector has been aggravated by the lack of equity
among corporates. Inefficient capital structures make it difficult for
companies to access bank funding to finance productive investment and at the
same time erode the banks’ long term profitability, as outlined in the scene
setter and Section 2.1. Interest rates have fallen since the crisis peak but
still remain high for corporates, especially small and medium enterprises.
Uncertainty ([35]) also
appears to have been a major factor driving the sharp contraction in
investment. However, the financial markets pressures have subsided and spreads
have returned to relatively low levels, and economic uncertainty is thus
expected to weigh less on investment in the future. Finally, the high number of
SOEs increases the risk of inadequate business decisions (Section 2.2).
 Graph 2.3.17: Non-residential investment and NFC debt 
 Source: European Commission. 
The Commission’s estimations show a
strong negative correlation between the accumulation of debt by non-financial
corporations in the pre-crisis years and the change in non-residential
investment since the crisis (Graph 2.3.17). In this graph, Slovenia is an
outlier, which could mean that the large decline in investment in Slovenia goes
beyond the increase in indebtedness. This may be partly explained by Graph 1.9,
which reflects the inability of Slovenian firms to increase savings via
profits, partly due to the wage dynamics and labour hoarding. In addition, as
outlined in the scene setter, the changing proportion of the debt of
non-financial corporations in GDP is less concerning than the sharp increase in
the debt-to-equity ratio. This reflects the unsustainable pre-crisis
growth-financing model, which was concentrated almost exclusively on debt. This
underscores the importance of attracting fresh equity, in particular through
alternative equity sources (venture capital) and foreign direct investment.
Improving the business environment and
attracting foreign direct investment is key.
Slovenia suffers from underinvestment in the private sector and difficulties
faced by companies in accessing bank funding to finance productive investment,
coupled with the limited availability of public investment (apart from EU
co-financed investments). This underscores the need for an improved business
environment and enhanced competitiveness in order to attract private
investment. Ongoing corporate sector deleveraging, lack of excess savings and
the tight credit conditions constrain domestic investment and underscore the
need to promote foreign direct investment. The latter would have positive
spillover effects on the rest of the economy in terms of labour and capital
productivity.
The role of FDI
Foreign direct investment (FDI) plays an
important role as a long-term, stable source of financing for the Slovenian
economy. At the end of 2013, the stock of inward
FDI in Slovenia stood at EUR 8.9 billion (24.7% of GDP), which is 3.5% lower
than in 2012 (1 pp. lower in terms of GDP). The rapid increase in the
pre-crisis period and relatively stable post-crisis stock show that Slovenia
managed in the past to attract FDI, albeit starting from a relatively low
level, and that FDI is a reasonably stable mode of financing even in crisis
times (Graph 2.3.18), in contrast to portfolio and other
investments.
FDI inflows declined in 2012 and 2013
but a considerable increase is estimated for 2014.
In contrast to the pre-crisis period, Slovenia has registered outflows of
non-equity capital and reinvestment as companies preferred
to pay out dividends rather than reinvest profits (Graph 2.3.19). Equity was also affected due to the
exit of foreign owners from financial corporations. While slower FDI inflows
are to some extent rational due to a deceleration in global activity and FDI
flows, Slovenia has been more affected than its peers (Graph 2.3.20). However, preliminary data for 2014
show positive flows in equity and debt instruments, and an increase in FDI
stock by approximately 15% in the first nine months of the year. 
 Graph 2.3.18: Inward FDI 
 Source: Bank of Slovenia. 
 Graph 2.3.19: FDI inflows 
 Source: Bank of Slovenia. 
 Graph 2.3.20: FDI inflows in Slovenia, Visegrád 4, EU 
 Source: Unctadstat. 
FDI stock remains concentrated in the
tradable sectors and the overcapacity in the non-tradable sector is being reduced. The largest share of the FDI stock in Slovenia is present in
industry (38% in 2013), followed by wholesale and retail trade (21%). Another
important FDI-attractive sector consists of financial and insurance activities
(19%). Graph 2.3.21 details the distribution of FDI among
sectors in 2013 and Graph 2.3.23 shows the evolution in tradable and
non-tradable sectors. In the pre-crisis period, a lot of FDI was directed into
the non-tradable sector and left some over-capacity after the bust, which has
taken time to correct. Given that Slovenia was in recession in 2009 and again
in 2012-2013, FDI growth remains sluggish compared to the pre-crisis period.
The manufacturing sector represents
almost 50% of total capital expenditure within greenfield investment (tangible investment in an area where no prior physical facilities
exist). This includes mainly transport equipment and knowledge intensive
sectors. The coal, oil and natural gas sector, and specifically the subsector
of filling stations, emerged as the leading job creator with FDI (Graph 2.3.22).
 Graph 2.3.21: FDI stock per sector in Slovenia, 2013 
 (1) A — Agriculture, forestry and fishing, B-E — Industry (except construction), G-I — Wholesale and retail trade, transport, accommodation and food services, J -— Information and communication, F — Construction, K — Finance and insurance, L — Real estate, M-N — Professional, scientific and technical; administrative and support service, O-Q — Public administration, defence, education, human health and social work, R-U — Arts, entertainment, recreation and other Source: Bank of Slovenia. 
 Graph 2.3.22: Sectoral composition of greenfield FDI in Slovenia, 2011-2013 
 Source: Financial Times' FDI markets dataset. 
 Graph 2.3.23: FDI stock in tradable and non-tradable sectors 
 Source: Bank of Slovenia. 
Most of the inward FDI originates from
European neighbouring countries. One third of the
FDI stock comes from Austria, which is the main foreign investor in Slovenia.
It is followed by Switzerland (12%), Italy (9%), Germany (8%), France (7%) and
Croatia (6%), according to 2013 data (Graph 2.3.24).
In terms of stocks of FDI, Slovenia lags
severely behind other countries. According to
Unctad data ([36]) the level
of FDI in Slovenia is markedly lower than the EU average of 49.5% of GDP
(Graph 2.3.25). Moreover, Slovenia’s peers
registered above-average FDI stocks built up during 1990s privatisations and
more recently due to active policies to attract FDI, such as improving the
business environment and investment incentives.
 Graph 2.3.24: Origin of inward FDI, stocks in 2013 
 Source: Bank of Slovenia. 
 Graph 2.3.25: FDI stocks in Slovenia, Visegrád 4, and the EU 
 Source: Unctadstat. 
Weak FDI flows are linked to the quality
of the business environment, whose attractiveness relative to other countries
continues to deteriorate. High regulatory costs,
limited access to finance, and high taxes on the skilled labour force (see
Section 3.2) are the three major weaknesses. These elements coupled with other
issues in the institutional environment such as corruption (see Section 3.3)
deter potential investors. The situation is aggravated by the lack of an
industrial or investment policy. The European Commission’s 2014 Industrial
Competitiveness report ([37]) concludes
that little has been done to address these weaknesses, making Slovenia less
attractive for foreign direct investment, especially when compared to other
countries in the region. The latter have been more active not only in
facilitating investment through a more business-friendly environment but also
in promoting it through effective investment incentive policies.
The untapped stock of potential FDI
limits Slovenia’s investment-financing possibilities. Ongoing privatisation and corporate restructuring in Slovenia offer
new opportunities for attracting FDI into the country, yet the business culture
needs to adapt to take full advantage of foreign investments. At a time when
domestic financing is scarce, and public investment depends on capital
transfers, FDI could help to fill the gap. Facilitating and actively
encouraging foreign investors to acquire partial or full control of a business,
or entering Slovenia via greenfield investment, would create stable and lasting
economic links to the country, and acquire technological and management skills
from abroad.
There is room for improvement in
Slovenia’s efficiency in attracting FDI. In 2013,
the Court of Audit conducted an analysis of the efficiency of supportive
measures for FDI and took the view that the actions of the authorities were not
conducive to attracting FDI. The audit concluded that the Ministries were not
focusing on the implementation of the measures that would have had the greatest
impact on the attractiveness of Slovenia for FDI.
The unsatisfactory trend in the inflow
of FDI could be reversed through targeted measures.
While an ambitious privatisation plan is seen as essential to attract fresh
capital into the country, more has to be done to eliminate bottlenecks and
unnecessary regulatory burdens and increase greenfield investment. The
‛single document’ (see Section 3.3) identifies areas where important
interventions are needed to reignite investment in Slovenia.
The forthcoming FDI strategy would
benefit from a coherent set of both FDI facilitation and FDI promotion
measures. This includes the creation of a
one-stop-shop for foreign investors, the development of a coherent set of
promotional activities, a set of specific industrial and tax incentives linked
to existing and future policies and strategies like the 2013 Industrial policy,
the 2011 Research and Innovation Strategy, and the forthcoming Smart
Specialisation strategy.  The creation and support of national value chains and
upgrading of absorption capacities of domestic firms can boost local employment
and thus help to increase public acceptance of foreign investment. Moreover the
size and fundamentals of its economy as well as its location make Slovenia the
ideal location for global value chains. Equally important is the development of
a communication strategy on the expected benefits of FDI for growth in the
country and on the comparative advantages of Slovenia as an FDI destination due
to its geographic location, natural resources and abundance of skilled labour.
The forthcoming strategy on FDI should support and complement future investment
projects, including those submitted in the context of the new EU Investment
Plan ([38]). 
Concentrating efforts on additional
supportive and easily attainable policies would quickly pay off. While privatisations coupled with effective communication policies
can potentially have positive long-term impacts, other policies aimed at
reducing regulatory burdens should be considered. Streamlining processes in the
area of spatial planning and registering property offer easy outcomes because
of the shorter implementation periods and the relatively low associated costs.
It is important to maintain the reform momentum and not dilute the ambition of
these plans in order to boost Slovenia’s attractiveness as a location for FDI
and reach the authorities’ ambitious FDI target for 2017 ([39]).
The fiscal situation in Slovenia in
recent years has been challenging; a prolonged
recession coupled with significant bank recapitalisations has resulted in a
sharp rise in public debt. Furthermore, successive years of consolidation have
dampened consumption and weighed on the domestic economy. As the recovery
gathers pace, the focus turns to the introduction of a well-designed fiscal
framework, which can assist in safeguarding debt sustainability. The focus of
budgetary execution should shift from temporary consolidation measures and
linear cuts to expenditure reviews, which provide a more sustainable approach
to public expenditure planning and can generate considerable efficiency
savings. 
Taxation
Slovenia's tax revenue-to-GDP rate is
below the EU average but the second highest among new member states. At 37.1 % of GDP in 2014, it is below the EU average of 39.1 % of
GDP. The tax structure in Slovenia is considered more growth-friendly than the
EU average with a higher share of indirect taxes and a lower share of direct
taxes as a proportion of total revenues. Revenues from direct taxes were considerably
lower than the EU average in 2013 (7.2 % vs. 12.8 % of GDP EU average). 
Slovenia plans to undertake a
comprehensive review of the tax system in order to
restructure the tax burden shifting tax away from labour taxes and abolish
inefficient tax allowances. The review is expected
to commence in the second half of 2015. While the tax wedge for different family types and
wages is at or below the EU average, the social contributions for the high earners among the employees are
much higher (15 % of GDP in 2013 compared to the EU average of 13.5 %).  This is mainly because there is no cap on
social contributions for employees. However, when all elements of taxation are
considered the tax wedge on
labour for the average-wage single earner (42.3 % in 2013) is below the EU
average (44.8 %). 
Recurrent taxation of immovable property
is considerably below the EU average with revenues
amounting to 0.5% of GDP in 2012 vs. an EU average of 1.5%. This indicates
scope for the introduction of further measures in this area. The authorities
are currently considering introducing a revised version of the real estate tax
that was repealed by the constitutional court in early 2014. The tax burden of a revised real estate tax if introduced would
remain at the same level as under the existing system of property taxation,
although minor increases in tax revenues are expected due to the broadening of
the tax base. Given that the level of property taxes in
Slovenia is considerably below the EU average there appears to be scope to
revise the rates.
The administrative process with respect
to tax compliance in Slovenia takes considerably longer than the EU average.  The total time needed to file and
pay taxes for a sample mid-sized company in Slovenia (260 hours) is
significantly higher than the EU average (179 hours). ([40]) The key issues for businesses is the uncertainty regarding the
length of procedures, particularly with respect to appeals and the uncertainty
frequent legislative changes (Section 3.3). The authorities have indicated that
there has been a reduction in the number of appeals pending in the last two
years but a decision in the more complex areas (i.e. VAT and corporate tax)
takes longer than the targeted duration.  The
government is addressing this and other issues via the Single
document, which includes measures to simplify tax procedures (Section
3.3). 
Measures to tackle the grey economy have
yielded initial positive results. The government has strengthened the programme to mitigate the impact
of the grey economy, including the introduction of stricter provisions
regarding the use of cash register software and strengthened presence of field
inspectors. The authorities estimate that the full year yield of these measures
equates to 0.3 % of GDP and an increase in voluntary compliance of
approximately 20 %. The Prevention of Undeclared Work and Employment Act
entered into force in January 2015; it introduced a voucher system for personal
supplementary work, which is expected to further reduce the grey economy. There
are plans to upgrade the existing system of tax registers by the end of 2015
subject to the current impact assessment, indicating value for money.
Debt sustainability
Slovenia's debt has risen sharply in
recent years from 22 % of GDP in 2008 and is expected to stand at 83 % of GDP
in 2015. While exceptional items, particularly bank
recapitalisations, have contributed significantly to this increase, sustained
primary deficits over the period have also attributed. Furthermore, the level
of contingent liabilities in Slovenia is high (government guarantees equate to
18 % of GDP), largely to state-owned entities (Section 2.2). This large stock
of guarantees poses an additional risk to public debt sustainability and
intrinsically links the sovereign to the performance of these entities. 
Slovenia's debt is expected to continue
to increase to 87 % of GDP in the medium term based on a no-policy-change
assumption ([41]). Under the baseline scenario of the debt sustainability analysis
(DSA) public debt is expected to steadily increase, as a percentage of GDP, in
the medium term (i.e. until 2025) (Graph 3.1.1). Under a scenario ([42]) where the structural primary balance (SPB) is assumed to converge
to a historical average, and another scenario ([43]) where all main macroeconomic variables converge to a historical
average, debt levels accelerate quickly on an unsustainable trajectory from
2017 onwards. However, if Slovenia was to fulfil its commitments (Graph 3.1.2) under the Excessive Deficit Procedure
and then abides by the rules of the Stability and Growth Pact, converging to
Slovenia's current medium-term objective by 2017 and maintaining it thereafter,
we would see an acceleration in the reduction of debt towards 60 % of GDP. The
reduction would be even faster if Slovenia were to adopt the fiscal commitments
outlined in its own Stability and Convergence Programme. ([44]) This underscores the fact that maintaining fiscal discipline is a
prerequisite for debt sustainability.
 Graph 3.1.1:   Gross debt % of GDP — DSA analysis 
 Source: European Commission calculations. 
 Graph 3.1.2:   Gross debt % of GDP — institutional scenario 
 Source: European Commission calculations. 
Fiscal framework
Slovenia is one of only a few countries
where the adoption of the legislation transposing the directive on budgetary
frameworks into the national legal order has been delayed and is still
on-going. According to the Slovenian Constitution,
as amended in May 2013, the legislation implementing the general government
budget balance/surplus rule (in structural terms) should have been adopted by
end November 2013. However, the draft Fiscal Rules Act implementing the
constitutional amendment was only adopted by the government in December 2014
and submitted to the Parliament.
The intention is for a new fiscal
framework to be in place for the 2016 budgetary process. The draft Fiscal Rules Act passed first reading in the Parliament
and is expected to be enacted in March 2015. The draft Act indicates the
minimum value of the medium-term fiscal objective as determined by the Treaty
and sets out the correction mechanism, which will be triggered in the event of
significant observed deviations from the medium-term objective or the
adjustment path towards it. The legislation will be complemented by revisions
to the Public Finance Act, which will include detailed provisions defining the
drafting, implementation and monitoring of the budget of all general government
entities. The Fiscal Council, as envisaged in the draft Fiscal Rules Act, will
be an independent body charged with monitoring fiscal policy and budgetary
execution and assessing compliance with the fiscal rules. The act provides that
the appointment of the Fiscal Council members will commence within fifteen days
of the act coming into force and the Council will establish its rules of
procedure within three months after its members are appointed. The focus is now
on having the rules and the Fiscal Council fully operational in time for the
2016 budgetary process.
Pension, health and long-term care system
Risks to the sustainability of the
pension system, adequacy of pensions and the sustainability of the long-term
care systems persist in light of an ageing
population and increased demand for health and long-term care services. The
proportion of the population aged over 65 has increased steadily and currently
stands at 17.1 %. Projections for 2060 indicate a considerable increase to 31.6
% (Graph 3.1.3). The demographic old-age dependency
ratio is projected to increase from 25.4% in 2013 to 52.5% by 2060. 
 Graph 3.1.3:   Breakdown of the population by age groups in Slovenia 
 Source: Ageing report 2015 for Slovenia. 
Pensions
Measures to underpin the sustainability
and the adequacy of the pension system in the long-term are still pending. The 2012 reform has enhanced the medium-term sustainability of
pensions by increasing and equalising the statutory retirement age for both men
and women, reducing the complexity of the system and eliminating some
anomalies, without automatically linking the statutory retirement age to life
expectancy. Initial results appear encouraging. The inflow of new pensioners
has almost halted and 80 % of retired people have reached full statutory
retirement age. Nevertheless, a slight increase in old-age pension costs
coupled with a simultaneous fall in revenues resulted in a significant increase
in the amount of budget transfers to the pension fund (from 29.2 % of total
pension revenue in 2012 to 32.0 % in 2013). The pension system in Slovenia is
facing long-term sustainability risks given the steep increase in projected
pension expenditure. In 2014, the OECD estimated that expenditures will
increase from the current level of 11.8 % of GDP to 18 % of GDP in 2050 (Graph 3.1.4). Preliminary projections for the
forthcoming 2015 Ageing Report suggest lower spending needs for pensions in the
long-term, but expenditure pressures in Slovenia are still higher than the EU
average. 
 Graph 3.1.4:   Sustainability of the pension system in Slovenia 
 Source: OECD 2014 Pensions outlook. 
The 2012 reform's overall impact on
pension adequacy remains contingent on labour market developments and warrants
close monitoring. The aggregate replacement ratio
deteriorated by 1 pp. in 2013 to 46 %. The average net pension dropped slightly
in 2013 both in nominal terms and relative to the average net wage. ([45])  The pension benefit ratio is projected to fall further until 2020
(from 33.8 % in 2013 to 28.9 % in 2020) before stabilising in the long run.
Longer contribution periods and stabilised entry pension levels could
positively affect the adequacy of pensions, if men and women are able to remain
longer in the labour market. The new indexation formula, longer reference
periods for calculating the pension base and the prolonged pensions freeze
might have a negative effect. Despite the modified calculation of the pension
assessment base introduced by the reform to prevent a further decrease in
pensions, the adequacy of pensions is still deteriorating. Coupled with the
2012 social reform, this has significant implications on the risk of poverty in
old-age, in particular for women ([46]) and people with disabilities (Section 3.2).  
A White Paper on the long-term
sustainability of pensions is due to be published in mid-2015. A new comprehensive reform is envisaged for 2016-17 and will
propose the reform of the first and second pillars with the objective of
addressing the sustainability of the pension system in the long term
(post-2030) and adequacy of pensions. A working group will prepare proposals
for pension reforms (including notional defined contributions and a points
system, i.e. the current system with adapted parameters). The existing
micro-simulation model will be upgraded in order to test various proposals. The
2012 reform envisaged the establishment of a Demographic Fund. A legal act
establishing this Fund is expected to be adopted by June 2015. 
Healthcare system
The ageing of Slovenia's population also
poses challenges to the sustainability of public spending on health care. According to preliminary projections in the Ageing Working Group in
2015, public health expenditure (measured as a share of GDP) is projected to
increase significantly in the next decade. At 7 % of GDP in 2012, the rate of
public spending on healthcare is close to the average of the EU (7.3 %) and has
remained stable since 2009. 
Health indicators for Slovenia show a
mixed picture. On the one hand, infant mortality is
the lowest in the EU; on the other hand, the gap between life expectancy and
healthy life years is one of the largest in the EU for both men and women.
While only a relatively small proportion of the population report unmet health
needs, the number of patients on waiting lists increased substantially in 2014
and indicates deterioration in accessibility to medical services. According to
the data on 47 selected services, in October 2014 there were more than 77 000
patients waiting, of whom almost 15 000 exceeded the maximum waiting time as
established by the authorities. 
Slovenia is committed to achieving cost
savings in the health care sector through rationalisation of expenditures. A recently introduced therapeutic groups for drugs and the pilot project
of common public procurement are showing positive results. This pilot project
in the health care sector shows that substantial savings can be achieved if
tenders are handled centrally. ([47]) From 2015, centralised public procurement will be obligatory for
all 28 hospitals. Measures to address the challenges of suboptimal provision of
health services, redefining the rights arising from compulsory health
insurance, and upgrading the payment models with respect to health care
providers remain outstanding. Further efficiencies could be gained through the
introduction of interoperable e-health solutions.  
The pending comprehensive review of
healthcare expenditure provides an opportunity to reallocate resources towards
priorities and generate efficiency savings. The
review will be undertaken in cooperation with the World Health Organisation
(WHO) and the European Observatory on Health Systems and Policies. A blueprint
for the review has been prepared and a workshop was held with the relevant
stakeholders in January 2015 to finalise the proposal. The project will be
wider in scope than just expenditure and will include; (i) an analysis of the
financing of the health system, (ii) an expenditure review (iii) a review of
the benefit basket and (iv) an assessment of health technology. The review will
involve a two-pronged approach; identify measures for 2016 (i.e. 'quick wins')
and also long-term measures that will require more time to implement.
The expenditure review and the National
Healthcare Resolution will serve as a basis for a comprehensive healthcare
reform, which is expected to enter into force in January 2016. The National Healthcare Resolution Plan, expected to be adopted in
mid-2015 will include measures to improve access to health services, as well as
measures to promote efficiency in the health sector by introducing models for
provision of services and infrastructure and the monitoring and revision
system.  
A reform of health care is under
discussion. The use of existing public resources
could be improved by strengthening primary care, rationalising inpatient care
and reforming the financing of the system. The authorities are planning to
adopt the reform of the health insurance schemes by the end of 2015, to take
effect from January 2016.
Long-term care
Public expenditure on long-term care is
projected to more than double by 2060 due to population ageing alone. The consequences of the economic crisis are visible in the
decreasing scope of formal long-term care, both institutional and
community-based (e.g. formal home help). Slovenia is characterised by
prevailing institutional forms of long-term care in the public sector. The
Association of Social Institutions of Slovenia estimated that in the first 10
months of 2013, approximately 3% of institutional care users left care and
either returned home or were taken into the care by relatives. The average
pension is not sufficient to cover the costs of institutional long-term care. 
At the end of 2013, the government
adopted a blueprint for long-term care but the
adoption of the legislation underpinning the reform has been postponed until
the end of 2015. The strategy is to address long-term care in the framework of
wider discussions on the sustainability of the healthcare sector, including the
reform of the health insurance schemes in order to ensure appropriate funding.
The main objective of the reform is to regulate and establish sustainable
funding of social and health services ([48]) by introducing compulsory public insurance, creating a single
entry point and enabling users to choose the type of service (in-home or
institutional) and the service provider. Its fiscal impact still needs to be
quantified.
The labour market is showing signs of
improvement but structural challenges persist concerning long-term
unemployment, and the employment of low-skilled and older workers. Unemployment rate decreased from 10.1% in 2013 to an estimated 9.8%
in 2014. Job creation has been strong in the non-tradable service sectors,
particularly in administrative and support services such as employment
agencies. At the same time, job losses in the construction sector have slowed.
Employment gains in the tradable sectors were modest (Graph 3.2.1). 
 Graph 3.2.1:   Employment in tradable and non-tradable sectors 
 Index 11/2005 = 100 Source: SORS, European Commission calculations. 
While the overall unemployment rate has fallen,
the number of long-term unemployed continues to increase, with consequences on
poverty. The long-term unemployment rate peaked at
5.7% of active population in the first quarter of 2014 (Graph 3.2.2) but decreased thereafter. In the
third quarter of 2014, it rose to 4.9% and represented half of the total
unemployed. The number of very long-term unemployed more than doubled in the
period 2008-13 but recently decreased to 2.6% (Q3-2014). The fact that fewer
people are leaving long-term unemployment points to the structural nature of
certain types of unemployment. Although staying below the EU average, poverty
and social exclusion continued to increase in 2013-14, moving Slovenia further
away from the EU2020 targets.
 Graph 3.2.2:   Long-term unemployment as % of active population 
 Source: European Commission. 
Labour market participation
Labour market participation of older and
low-skilled workers remains a challenge. The
employment rate of vulnerable groups (older and low-skilled workers) is
persistently lower than the EU average. Moreover, the employment rate in these
groups has fallen substantially since 2008 due to a sharp decline in economic
activity. The sectors that predominantly employ less skilled people (e.g.
construction and manufacturing) were worst affected by the economic crisis.
Consequently, the employment rate of low-skilled workers fell the sharpest
(from 52% in 2008 to 37% in 2014). The employment rate of older people is the
lowest in the EU (50% in 2014) and it stagnated between 2008 and 2014. The
employment of older women has picked up and increased by almost 10 pps. between
2008 and 2014 (Graph 3.2.3).
Slovenia has made limited progress in
developing an efficient and adequately funded system of active labour market
policies (ALMP) to address these challenges.
Slovenia reduced the allocated budget for the implementation of the ALMP
programmes in 2015, although the budget is expected to increase after the
adoption of the supplementary government budget in February 2015 and the
receipt of funds from the European Social Fund. In addition, in the period 2015-20,
EUR 200 million will be earmarked for lifelong learning measures specifically
targeting older and low-skilled workers. It is important to adequately support
the vulnerable population groups in order to address persistent structural
imbalances on the labour market as the current pattern of ALMP resources risks
underinvestment in the skills of the disadvantaged. ([49]) The evaluation of ALMP is envisaged in the context of the
implementation of the European Social Fund, which is the main source of funding
for these measures.
 Graph 3.2.3:   Employment rate of vulnerable groups of population in Slovenia and the EU28 
 Source: European Commission. 
Labour market segmentation and youth
unemployment
High segmentation is affecting
particularly the labour market entry of young people. Youth unemployment in the 15-24 age group peaked in 2012 and has
since moderated to below the EU average. However, unemployment in the 25-29 age
group has risen above the EU average and peaked at 14.6% in 2013. High
unemployment in this group could be partially explained by lower employability
of students who concluded their studies with delays and higher reliance on
occasional student work, accounting for almost 80% of the temporary jobs occupied
by young people. Slovenia registers the highest share of young people (15-24
years) in temporary employment in the EU (73.2% in 2013). 
Labour market participation of young
people has been helped by Youth Guarantees.
Slovenia increased the cut-off age of qualifying for the Youth Guarantee
measures from 25 to 29 years and will invest EUR 157 million (mostly coming
from the ESF) in the period 2014-15. The first results of the national analysis
presented in Q2-2014 show that people enrolled in Youth Guarantee schemes
received 70 % more training, 40 % more job offers and ten times
more meetings with employers. More young people who are not registered are
being helped as a result of cooperation with school counsellors, who guide
dropouts directly to public employment services. The latter have adapted their
online tools to extend their reach. 
Concrete steps have been taken to
address the labour market segmentation of young people. The Act on Occasional Student Work will increase social security
for students, while preserving flexibility. ([50]) The act introduces a minimum hourly wage and social security
contributions for student work. The non-wage costs for student work, which now
include social contributions from employers and students, will increase substantially,
however the student work will still remain one of the cheapest forms of work.
These measures will yield an additional EUR 15 million, which will be partially
used to finance scholarships. The evaluation of the reform is due in September
2015 and additional measures will be considered only thereafter. Outstanding
measures (e.g. official recognition of work experience) will also be addressed.
The 2013 labour market reform improved
labour market segmentation and flexibility. The
reform simplified dismissal procedures and reduced dismissal costs, but
tightened the regulation of fixed-term contracts and restricted the use of
temporary agency work. The initial analysis of the impact of the reform shows
positive results. The use of open-ended work contracts has increased and use of
fixed-term contracts has diminished. However, more recent quarterly data do not
conclusively prove the decrease of temporary contracts, as their use seems to
be closely dependant on the economic cycle (Graph 3.2.4). Measures promoting the use of
permanent contracts for hiring young people (in the framework of Youth
Guarantees) have also contributed to this result. The next full report on the
effects of the reform is to be prepared in March 2015. Particular attention
will be paid to the employment trends of the self-employed, economically
dependent persons and, in particular, to the possible abuse of contracts that
are attractive because of low social contributions. The labour inspectorate has
stepped up the investigation of contractual arrangements.
 Graph 3.2.4:   Cyclicality of temporary employment 
 Source: European Commission. 
Slovenia has addressed segmentation
through the equalisation of the non-wage costs of some forms of work contracts
(other than student work) while keeping their flexibility. Since the beginning of 2014 full social contributions (15.5% to be
paid by employees and 8.85% by employers) have to be paid on two other most used
types of civil contracts. On the basis of an analysis of costs of various forms
of work contracts, the government will propose measures for the equalisation of
non-wage costs in mid-2015. While this may have a positive impact on
segmentation, the impact on employment promotion may be limited as the tax
wedge for employment contracts at all level of wages and types of families in
Slovenia is close to or lower than the EU average.
Education 
Slovenia has reached the education
targets of the Europe 2020 strategy. Early school
leaving is the lowest in the EU (3.9% in 2013) and 40.1% of the population aged
30-34 has attained a tertiary qualification. The focus now needs to shift to
the quality in education. As measured by the Programme for International Student
Assessment (PISA), the performance of 15-year-olds in literacy, mathematics and
science remained unchanged between 2009 and 2012 (Graph 3.2.5). While Slovenian teenagers perform
worse than the EU average in reading, they perform better in mathematics and
science.  
 Graph 3.2.5:   Percentage of low achievers on PISA tests in 2009 and 2012 in Slovenia 
 Source: OECD; Programme for international student assessment. 
Inefficiencies in the higher education
system are seen in the high rate of dropout and fictitious enrolment. The dropout rate from university is estimated at 35%. Fictitious
enrolment to post-secondary vocational education is estimated to account for
more than half of first-year students. This is mostly due to the incentives and
social benefits linked to the student status and weak administrative checks ([51]). Half of all students hold a job during their study years at the expense
of performance and prolonged duration of study. In parallel, the quality of
implementation of tertiary programmes risks being affected by the decrease in
total expenditure on education. It has fallen substantially in the past year.
Spending on tertiary education was reduced by 13 % between 2011 and 2012
or 5 % between 2008 and 2012 (Graph 3.2.6).
 Graph 3.2.6:   Public expenditure for formal education (EUR million) 
 Source: SORS. 
The amendments to the Higher Education
Act are expected to address the issue of fictitious enrolments. While the draft was prepared in October 2013, the change in
government delayed its adoption. The government plans to adopt the law in 2015
in order to enter into force in academic year 2017-18. The principal objective
of the act is to decouple student status from student benefits in order to
remove the incentives for fictitious enrolment. An important step in this direction
has been the introduction of a new electronic information system which has
become an official source of information on student status and is used by
public institutions to grant scholarships, transport and food subsidies,
dormitories, health insurance and student work. In 2014/2015 it was also used
for electronic enrolment into higher education. The in-built controls have
already been successful at preventing some fictitious enrolment into higher
vocational education and training. By the end of 2015, the aim is for the
system to become an analytical tool for evidence-based policy making.
Skills mismatch
Skills mismatches have become less
evident. Slovenia displays one of the lowest
proportions of young people with tertiary education in jobs requiring low
qualification (vertical mismatch). At 66.2%, the proportion of upper secondary
students following vocational education and training remains above the EU
average (50.4% in 2012).  However, skills shortage in the long run could mostly
affect high-skilled occupations. Demand for high-skilled workers is projected
to increase substantially. 
Slovenia has undertaken several actions
to address the risk of skills mismatch and numerous measures are planned until
2020. The public employment services are currently
working on a bi-annual forecast of deficit occupations in parallel with the
establishment of the National Career Point, which aims to develop the
methodology for better career orientation. Skills mismatch is planned to be
further addressed by introducing scholarships for deficit professions,
improving the link between education and the local economy. The government
intends to close the gap in skills by linking study specialisations to the
priority areas of the Smart Specialisation strategy. In the field of vocational
education, the government plans to introduce apprenticeships via a new law,
which will primarily redefine the role of the apprentice as an employee and
clarify the role of the social partners. A coordinating body for vocational
education has been set up. Its role is to develop new projects and to establish
the strategic direction for vocational education with stakeholders. Subsidies
for apprenticeships and coordination between different ministries will play an
important role in setting up the system. Finally, transparency of
qualifications on the labour market will be enhanced with the new Act on the
Slovenian Qualifications Framework expected to be adopted in 2015.
Social issues
Poverty and social exclusion continued
to increase in 2013. This development moved
Slovenia further away from the poverty and social exclusion target. The number
of people at risk of poverty or social exclusion increased and reached
410 000 in 2013, considerably above Slovenia’s target of 320 000.
While the poverty rate remains below the EU average, it has consistently
deteriorated since 2009. The main reasons for the continuous deterioration in
material welfare are a decline in employment and the rise in unemployment to
the 1990s levels. Furthermore, wages, pensions and social transfers declined in
real terms, and the revised regulation of social benefits implemented in
January 2012 lessened somewhat the role of social transfers in alleviating
poverty for certain groups.
 Graph 3.2.7:   The likelihood of the old-age poverty rate 
 Source: OECD Pensions Outlook 2014. 
Although the social protection system is
performing its function, there has been an increase in at-risk-of-poverty rates. In 2013, total household disposable income fell by 3.3%, less
sharply than the year before (5.2% in 2012). In real terms, it is now more than
9% lower than in 2008. The substantial drop in total household disposable
income in 2013 had particular repercussions for the at-risk-of-poverty rate for
children (17.5% in 2013) and doubled the at-risk-of-poverty rates for young
people. While income inequality remains among the lowest in the EU, it has
worsened given the unequal decline in incomes across all brackets. The
continued low level of income inequality can be attributed to a compressed wage
structure and a well-targeted allocation of social transfers, which decreases
the risk of poverty by 27.8 pps. (EU average 27.6 pps.). Access to public
services has stagnated since 2012. 
Corrective measures were introduced in
the 2012 social reform to improve access to social transfers. The Act Amending the Social Assistance Benefits Act and the Act
Amending the Exercise of Rights to Public Funds Act, in force since September
2014, have eased entitlement conditions for social benefits. The amendments are
aimed at single-parent families, families with school-age children and large
families, older recipients of social transfers and other vulnerable population
categories. Restrictions in the entitlement conditions for social assistance
benefits introduced in 2012 resulted in a significant decrease in take-up by
older beneficiaries. In the medium term, the government plans to introduce a
comprehensive social activation system, which will link rehabilitation
programmes to the ALMP. By developing comprehensive services for the excluded
from the labour market, the government expects to improve the social inclusion
and their employability. 
 Graph 3.2.8:   Social exclusion indicators 
   Source: European Commission. 
Administrative burden and limited access
to finance hinders doing business in Slovenia.
Suboptimal corporate governance, high tax wedge on skilled work force (Section
3.1), significant involvement of the government in the economy and vested
interests (Section 3.5) have negative repercussions on doing business in
Slovenia. Productivity remains low in a number of industrial sectors with a
high concentration of public ownership (Section 2.2) and the inflow of foreign
direct investment is limited compared to the EU average (Section 2.3). Frequent
changes of the governments have contributed to uncertainty and the postponement
of investment decision. Nevertheless, Slovenia has developed a flourishing
start-up community and numerous exporters drive the growth of the economy. In
search of alternative ways of funding, several young entrepreneurs have
successfully sourced financing for innovative products through crowd-funding
portals abroad. 
Reduction of administrative burden
The high number of laws and numerous
changes in the legislation make it difficult to run a business and comply with
local regulation. In the recent years, Slovenia
took several measures to fight red tape. The so-called one stop shop has been
supporting entrepreneurs in setting up their business and the use of
e-government services has increased (Graph 3.3.1). However, numerous changes in
legalisation have contributed to a significant increase in the number of laws
and bylaws ([52]). The
reduction of administrative burden is one of the key issues for many
stakeholders, including investors, who point to frequent changes of regulations
as a negative feature of doing business in Slovenia. Insufficient
administrative capacity increases waiting times and discourages potential
investors (Graph 3.1.1). This concerns in particular the areas of spatial
planning, construction permits and tax compliance ([53]). Spatial planning regulation is decentralised and complex. It
falls under the remit of several government bodies, creating high entrance
barriers and uncertainties for investors, both domestic and foreign. This
overregulation also generates compliance issues. For instance, Slovenian
retailers find it costly and difficult to comply with consumer legislation. In
addition, both retailers and consumers are critical of public authorities' role
in ensuring compliance with consumer legislation ([54]).
 Graph 3.3.1:   Components of administrative burden in Slovenia 
 0 = weakest performer country, 1 = best performer country Source: European Commission, World Bank, World Economic Forum, Intrum Justitia, OECD. 
The government has identified several
measures to cut red tape by 25%, but these need to be prioritised and
implemented. The key tool in order to manage the
high regulatory stock is the Single document for better regulation and business
environment and increased competitiveness ([55]). While the document maps the lengthy processes of licencing and
authorisation, it is not contributing to shortening of the waiting times.
Despite the fact that several measures have been implemented, the Single
document lacks necessary prioritisation, implementation plans and clear
monitoring schemes. Coordination among several ministries and governmental
bodies is equally important for successfully reducing regulatory cost. Slovenia
plans to introduce "competitiveness proofing" and the "SME
Test" (the latter has been in pilot phase for several years) in order to
make future laws and regulations more business-friendly. However, introduction
of these tools for "better regulation" has been further postponed to
2016.
Access to finance
Bank lending activity continues to
decline, mainly affecting SME’s. The recent banking
sector recapitalisation is expected to show full results only in 2016.
Restrained bank lending and high interest rates are weighing on the financing
capacity of SMEs (Section 2.1). While the proportion of rejected loan
applications has decreased over the past six years, the number of SMEs
reporting a deterioration in the willingness of banks to provide loans has
increased substantially and is one of the highest in the EU (Graph 3.3.2). 
Tailor-made financial instruments for
SMEs exist and could be upgraded. While the
Slovenian development bank SID Banka has had two direct credit lines for
SMEs since mid-2013, only a limited number of SMEs have used them. They have
drawn only a fraction of the available funds (approximately one fifth of the
EUR 500 million), partly due to the stringent application conditions. The
Slovenian Enterprise Fund (SEF) has been more efficient in providing funding to
innovative SMEs. The SEF also plans to introduce new debt and equity
instruments, which will focus on start-ups and fast-growing micro enterprises.
In addition, the government is looking into the possibility of establishing
cross-border venture capital together with Austrian and Italian partners.
Finally, the "twin projects" (combining seed financing and
mentoring), recently introduced by SEF is a positive initiative according to
stakeholders that can help viable SMEs to increase their knowledge about
available instruments and make them more investment-ready. However, as bank
lending continues to deteriorate for SMEs, there is a need to build on these
new instruments, focusing on alternative financing mechanisms and attracting
more private funding to leverage public investment. 
 Graph 3.3.2:   Willingness of banks to provide the loans in the last six months 
 Willingness of banks to provide a loan has improved (0), remained unchanged (1), deteriorated (2). Source: SAFE survey. 
Provision of services and regulated
professions
The Slovenian services sector is marked
by a low level of cross-border investments. The
level of intra-EU establishment ([56]) is significantly lower in Slovenia than in other EU Member States
(Graph 3.3.3). Slovenia suffers from a low inflow
of foreign direct investment (Section 2.3) and it is below the EU average in
terms of the establishment of foreign firms in the country. This could be
partly explained by the complex regulation of professions and concessions. 
Modernisation of the system of
concessions and regulated professions could increase competition in the
Slovenian service sector. Regulated professions and
concessions limit the number of service providers and choice for consumers
through quantitative and territorial restrictions and tariff setting. The OECD
estimates that the environment for provision of services in Slovenia does not
lead to an effective competition and presents elevated entry barriers for
businesses and individuals ([57]).
Deregulation of professions has been slowly progressing despite some delays.
After deregulating the crafts and cultural sectors, the government is reviewing
existing laws to ease access to regulated professions in the retail sector.
Slovenia is taking part in the mutual evaluation of regulated professions at EU
level. In this context, it will be assessed whether the restrictions are
proportionate and justified by the general interest. Although the government
undertook a review of some of the concessions, no reforms have been proposed. 
 Graph 3.3.3:   Level of intra-EU establishment 
 Source: European Commission. 
Entrepreneurial activity
Start-up and early-stage entrepreneurial activity continued to strengthen in
2013-14 ([58]). The state of start-up entrepreneurship in Slovenia changed
considerably with the onset of the crisis. Start-ups by
Slovenian founders have risen over USD 130 million since 2006, half of it in
2014. The start-up sector is growing faster than
the economy's average and is creating new jobs with high added value. The Government has been providing support to this industry ([59]). In order to foster innovation, job creation
and economic growth it would be
important to maintain these efforts and to link all actions to the existing
innovation policies and strategies.
R&D and innovation
The level of R&D investment in
Slovenia has increased considerably but the results have lagged. Increases in R&D investment (Graph 3.3.4) could be attributed to a favourable
system of tax incentives ([60]) and
significant co-financing from the Structural Funds (Box 3.3.1). However, the low performance
regarding research and innovation outputs calls into question the quality of
the investments. ([61]) In light of
these results and the reliance on the EU funds, the innovation policy will need
to be updated in order to remain sustainable in the long term. 
 Graph 3.3.4:   R&D investment 
 Source: European Commission. 
An effective policy response to the
R&D challenges is not yet in place. The 2011
Research and Innovation Strategy has not been implemented yet. This strategy
includes important measures to foster knowledge transfer and the
commercialisation of research results. The key measure is the introduction of
institutional funding linked to an assessment of research performance of
universities and public research institutes. Other essential measures include
removing obstacles to university spin-outs and to cross-border venture capital.
The Research and Innovation Strategy needs to be coordinated with the Smart
Specialisation Strategy as well as the forthcoming FDI strategy in order to
harness the country’s potential for smart growth and the knowledge economy.
Especially, implementation mechanisms are needed to direct funding towards
priority areas and increase the impact. Boosting the quality of research investments,
stronger and more effective governance and a focus on implementation are needed
to support the efficient use of resources.
  Box 3.3.1: Overview and general assessment of absorption capacity for EU funds    The overall implementation of the Slovenian Cohesion policy's operational programmes has been positive, with Cohesion fund lagging slightly behind. By February 2015, Slovenia drew 81.72% of all allocated funds for the programming period 2007-13 under the ERDF, CF and ESF facilities. This is a positive result compared to the EU28 average (76.74%) or the Visegrad Group average (71.21%). Absorption of the funds has increased in 2014, when EUR 701 million has been certified (51% of the total amount for CF certified so far was done in 2014). In comparison with 2013, Slovenia certified EUR 680 million. Given the N+2 rule for Slovenia, a sum of EUR 597 million (EUR 406 million for CF, EUR 136 million for ERDF and EUR 55 million for ESF) still needs to be spent by end-2015. No funds have been lost so far as a result of the N+2 rule and projections show that the risk of losing funds at closure is limited. However, low absorption capacity and delays related to the Cohesion Fund' implementation (mainly rail and waste-water sectors) result from the late start of the implementation, lengthy permitting and public procurement procedures (Section 3.5) as well as the economic crisis. Graph 1:        EU funds absorption and economic governance 
 ERDF = European Regional Development Fund; ESF = European Social Fund; CF = Cohesion Fund Source: European Commission. 
Finalising the Smart Specialisation
Strategy will be an important milestone. This
strategy will be instrumental for investments under the European Investment and
Structural Funds in the period 2015-20. The main pending challenges are a clear
prioritisation, consistency with other policies, coordination of stakeholders
and an effective implementation.
The level of energy consumption and CO2
emissions in Slovenia is considerably higher than the EU average. Transport is the most energy-intensive sector, with its share in
energy consumption increasing since 2005. This can be partially explained by
the geographical position of Slovenia and the transit passing through the
country. While Slovenia has diversified its sources of energy, it remains
highly dependent on its imports. The contribution of energy deficit to the
trade balance is almost double the EU average (5.7 % vs 3.1 % of
GDP). Slovenia's current primary energy consumption is slightly below the
EU 2020.
Smart, sustainable, interconnected transport
network
A strategy for infrastructure
development in Slovenia is in place. With the
adoption of the Operational Programme for the period 2014-2020, an
implementation framework is now in place with clear policy priorities, coupled
with planning and funding instruments targeting investment in key transport initiatives.
The comprehensive transport strategy will be instrumental for investments in
transport under the European Investment and Structural Funds in the period
2014-20, also in light of the expected decrease in national investment
spending. It is expected to contribute significantly to the development of the
transport infrastructure by developing a mature and feasible project pipeline
and thus reducing the bottlenecks especially in the railway sector.
Development of rail infrastructure and
promotion of public transport are the key priorities. The TEN-T core network projects on the Mediterranean and the
Baltic-Adriatic Corridors will be given priority under the Connecting Europe
Facility. This includes the new second railway track line Divača-Koper and
the upgrading and extension of the port of Koper. The need to modernise the
railway infrastructure could go hand-in-hand with the removal of market
barriers in the railway sector and better performance of rail services. Urban
transport in Slovenia still suffers from an excessive reliance on private cars.
Despite some positive examples, such as the city of Ljubljana, development of
public transport in Slovenian cities remains crucial.
Interconnected energy networks
The Slovenian energy networks face
several challenges. The energy mix in Slovenia is
mainly derived from hydrogenation (31%), nuclear power (24%) and fossil fuel.
The strengthening of electricity networks and better interconnections with
Italy would address infrastructure gaps and power system "loop flows"
from neighbouring countries.
Projects to improve electricity
interconnection capacity are underway. The
interconnection capacity is currently at 82% of the production capacity in
Slovenia, higher than the EU average. Nevertheless, Slovenia has several
electricity Projects of Common Interest under the guidelines for trans-European
energy infrastructure, including two electricity clusters with a high voltage
transmission line between Slovenia, Croatia and Hungary and a high voltage
transmission line between Slovenia and Italy. 
Competition in the electricity market
has accelerated. Until now, almost 50 000 customers
switched their electricity supplier, with no supplier dominating the market.
The entry of a new supplier (GEN-I) in the gas sector also lead to lower prices
for the first time since 2009. Geoplin remained the company with the largest
market share (around 63%) in gas distribution.
Slovenia has a diversified gas supply
but lacks storage facilities and is entirely dependent on imports. A new north-south gas interconnection to the Hungarian gas
transmission network and reinforcement of the interconnection to the Croatian
gas transmission network will increase security of supply in Slovenia and the
neighbouring countries. Several gas projects of common interest are highly
relevant for Slovenia. In particular the LNG terminal in Krk (Croatia) would
improve the security of supply to the region.
Environmental compliance and beyond
Slovenia is the best performing member
state in terms of municipal waste recycling among the countries that have
joined the EU since 2004. Slovenia’s recycling rate
reached 47 % in 2012. Municipal waste generation remained relatively low,
at 362 kg per capita in 2012 compared with the EU average of around 490 kg.
Landfilling decreased from 58 % in 2011 to 51 % in 2012 but remains
high. 
Investing in the water sector is a key
priority. In particular, compliance gaps persist as
regards Slovenia’s Accession Treaty obligations for the wastewater sector. The
final deadline for complying with the Urban Wastewater Treatment Directive is
the end of 2015. The latest available data for Slovenia shows compliance rates
for collection and treatment of 30% in 2009 and 2010.
Slovenia's diverse and rich natural
environment is a key element of its tourism strategy. Its biodiversity has been well preserved and Slovenia has the
biggest share of land area covered by Natura 2000 in the EU (37.85% vs. EU
average of 18.4%) ([62]).
Well-preserved nature delivers multiple socio-economic benefits. It has been
recognised in the Slovenian Tourism Development Strategy for 2012-16 as a key
attraction for tourism. 
Broadband
Broadband networks are the key
infrastructure of the digital economy and society. As
regards the five main drivers of the digital economy, Slovenia ranks 24th
out of 28 Member States on connectivity, 14th on human capital, 16th
as regards the use of internet services, 20th in integration of
digital technologies by business, and 22th in digital public
services. It has been estimated that a 10 percentage point increase in
broadband penetration is associated to an annual growth in per-capita GDP of
some 1 to 1.5 percentage points. ([63])  Slovenia has a very low fixed high-speed broadband penetration
(ranking 26th out of 28 member states). Also mobile broadband
take-up remains comparably low. Operators indicated that this is due to lack of
market demand. This might also result in comparably high prices (Slovenia ranks
19th out of the 28 member states). Slovenia is currently in the
process of adopting a Broadband plan. Finalising and implementing a strategy to
further promote the nation-wide take-up of high speed broadband at reasonable
prices could have a positive impact on growth. 
Enhancing the efficiency in public
administration and the independence of the judicial systems are two of the
seven key priorities of the Annual Growth Survey 2015. Simpler legislation, an enhanced business environment and a
transparent decision-making process would increase the credibility of the
public administration. In Slovenia, the general government effectiveness score
and the responsiveness of administration remain below the EU average (Graph 3.5.1). 
 Graph 3.5.1:   Institutional strengths and weaknesses in Slovenia 
 Source: World Economic Forum - Global Competitiveness report 2014-15. 
E-government
Slovenia shows mixed performance in
adopting the use of e-government tools. Slovenia
performs quite well in indicators related to starting up a business and
increasing the use of e-government. From 2015, business interaction with the
authorities will involve exclusive use of e-invoicing. However, the conversion
of state services to electronic systems has not been fully implemented as
administrative and business procedures have not been sufficiently computerised,
and there is often inadequate connection between front and back-office systems.
The transition to e-procurement is expected to take place in the course of
2015. To date, an electronic portal has been launched and e-notifications have
been enabled. Other services will be introduced gradually (e-auctions,
e-contracts and interoperability with other governmental databases). As the
electronic tenders system is not yet operational, Slovenia currently has the
lowest share of e-procurement in the EU ([64]). The Point of Single Contact for services has yet to be finalised
and all procedures have yet to be made available online. 
Efficiency of public administration
Government effectiveness in Slovenia is
below the EU average. The indicator of government
effectiveness improved somewhat in the period 2008-12 and is the highest in
comparison to its regional peers (Graph 3.5.2). However, the governance effectiveness
indicator in 2012 was lower than in 1996, the aftermath of the country’s
independence, when the institutions first had to be established. The
effectiveness of public administration in Slovenia was adversely impacted by
the lack of strategic planning and budgeting, weak governance and
implementation of strategies, as well as insufficient rationalisation of
internal functions and structures ([65]). The deterioration in the perception of the government performance
could be linked to the severe economic crisis and the numerous changes of the
government in recent years. 
The government's strategy for
development of public administration 2015-20 will aim at modernizing the public
administration and improving its quality. The
strategy is expected to address strategic planning of legal, organisational and
procedural aspects, human resource management and the fight against corruption.
The strategy is at the public consultation stage and is expected to be adopted
by the end of February 2015. The central element of the strategy is to enhance
the implementation capacity of Slovenia's public administration. Various
strategies already prepared in the field have lacked implementation and
enforcement plan. 
 Graph 3.5.2:   Government effectiveness 
 Source: World bank - Worldwide Governance Indicators 2008 and 2012 
Enhancing the administrative capacity of
institutions is key. In order to reap the full
benefits of cohesion policy, sufficient administrative capacity of institutions
involved in the implementation of cohesion policy needs to be ensured. This
includes offices that provide for systemic improvements, notably in the field
of public procurement, state-aid and project management. A useful tool to
achieve these improvements will be the technical assistance available in the
operational programme for the new financial period 2015-20. In the 2007-13
period it was underused due to a very low allocation. The increase in technical
assistance funds will co-finance activities such as staffing, evaluations,
communication and trainings. Spatial planning and the issuance of environmental
and building permits tend to be time intensive. A national analysis of the
organisation of operations of municipalities shows that the lack of staff and
financial capabilities, especially of smaller municipalities, is impeding
efficient organisation of work. 
Justice reforms
The efficiency of the courts further
improved in 2014, although at a slower pace. Positive
trends in the rate of resolving civil and commercial cases and the length of
proceedings have been maintained and the backlog has been further reduced by
18%. In the area of enforcement, further improvements are expected as a result
of recent amendments to enforcement legislation, which improved the enforcement
of real estate and the decision-making process. The remit of the Supreme
Court's project of updating business processes at courts (including case
management reforms) was expanded to cover enforcement and labour and social courts.
Several draft laws were proposed with the aim of providing more transparency
and objectivity to the process of appointment of judges, reinforcing the
Judicial Council in the area of ethical standards, and  improving the procedure
for acquiring free legal aid.
Lengthy proceedings and a high number of
unresolved cases still pose problems. The reduction
in litigious civil and commercial cases can be partly attributed to a 13 %
decrease in the number of new cases in 2014 (compared to 2013 data), as the
number of resolved cases also decreased by 3 %. Similarly, a decrease of
more than 60 000 in incoming cases partly helped to maintain a positive trend
in the area of enforcement. Slovenia had the second highest backlog and the
highest number of incoming civil, commercial, administrative and other
non-criminal cases per inhabitant in the EU ([66]). Uneven workload of judges is to be partly addressed through
management and court specialisation measures. The Judicial Council aims to
improve the quality of the justice system, particularly through improving the
appointment process and the training of judges. A large surge in incoming
insolvency cases has led to an increase in the pending insolvency cases before
the Commercial courts. The increase can be partly attributed to new and amended
reorganisation procedures and financial incentives for filing insolvency since
2013. In 2014, Slovenia had the lowest percentage of consumers in the EU who
found it easy to resolve disputes with businesses through courts and through out-of-court
bodies ([67]).
Insolvency
legislation
There has been progress concerning the
insolvency framework. In January 2015, the
authorities presented an advanced version of the on-going evaluation exercise
of the laws adopted in 2013, which amended and complemented the insolvency law.
The authorities have indicated that they do not currently see a need for
further amendments to the insolvency framework. The key finding of the
evaluation is that the new framework allows more restructuring opportunities to
companies in financial difficulties. In addition, the existence of such legal
tools has reportedly provided an indirect incentive to the parties to negotiate
and reach out-of-court settlements. 
Protection of competition 
The Competition Protection Agency (CPA)
faces hurdles that hamper the effective enforcement of the competition rules. The budgetary autonomy and the independence of the CPA have been
maintained. However, the Agency continues to face challenges that reduce the
effectiveness of their enforcement actions. The CPA lacks the power to impose
fines on undertakings directly in its administrative decision, having to
conduct separate minor offence proceedings. These misdemeanour proceedings
involve standards that are different from the administrative procedure and give
rise to legal uncertainty. In practice, the Agency waits until its
administrative decision has become final before starting the fines proceedings.
Given that the administrative judicial review until recently appeared rather
lengthy, the infringement often became time-barred before the Agency was able
to impose a fine. Even though the 2013 amendments regarding the competent court
in first instance for administrative judicial review of competition cases could
lead to shortening of the duration of the review process in cases where the
first instance judgment is not appealed, the existing framework hampers the
effectiveness of the CPA and could lead to limited imposition of fines and
underdeterrence.
Credibility of institutions
Credibility of institutions is
essential. Allegations of corruption, political
interference and doubts regarding the integrity of high-level officials within
the public administration at state and local level and in state-owned companies
came to public attention in 2013 and 2014. Perception regarding the diversion
of public funds has worsened substantially in Slovenia and now stands far below
the EU28 average (Graph 3.5.3).
 Graph 3.5.3:   Diversion of public funds 
 Source: World Economic Forum - Global Competitiveness Report (2008-09; 2012-13) 
Irregularities in public tender
procedures have led to the interruption of payments from the Cohesion Funds. While these particular malpractices have been corrected and
payments restored the perceptions of widespread systemic corruption
remains. In spite of some progress in achieving transparency,
vulnerabilities are widespread in the energy, construction, urban planning and
healthcare sectors, where anti-corruption safeguards have limited impact. 
A new two-year programme to fight
corruption was adopted in January 2015. The first
programme of 15 measures for prevention of corruption, adopted in March 2014,
was sidelined due to the change in government. The government reiterated its
commitment to fight corruption. The new programme includes 11 perennial
measures aimed at restoring the quality and credibility of public
administration in Slovenia, including the public procurement and the ethic
codex for politicians and government officials. Another major element in the
fight against corruption consists in enhancing the credibility of the
Commission for Prevention of Corruption.
 Commitments || Summary assessment([68]) 
 2014 Country-specific recommendations (CSRs) 
 CSR 1: Reinforce the budgetary strategy with sufficiently specified structural measures for the year 2014 and beyond, to ensure correction of the excessive deficit in a sustainable manner by 2015 through the achievement of the structural adjustment effort specified in the Council recommendation under the Excessive Deficit Procedure. A durable correction of the fiscal imbalances requires a credible implementation of ambitious structural reforms to increase the adjustment capacity and boost growth and employment. After the correction of the excessive deficit, pursue a structural adjustment of at least 0.5 % of GDP each year, and more in good economic conditions or to ensure that the debt rule is met in order to put the high general government debt ratio on a sustained downward path. To improve the credibility of fiscal policy, complete the adoption of a general government budget balance/surplus rule in structural terms, make the medium-term budgetary framework binding, encompassing and transparent, and establish the necessary legal basis for a functioning fiscal council defining its remit within the budgetary process and introducing clear procedural arrangements for monitoring budgetary outcomes as soon as possible. Launch a comprehensive review of expenditure covering state and local government levels, direct and indirect budget users and municipality-owned providers of utilities and services in the area of healthcare by the end of 2014 with a view to realising budgetary savings in 2015 and beyond. || Slovenia has made some progress in addressing CSR 1 (this overall assessment of CSR 1 excludes an assessment of compliance with the Stability and Growth Pact): Progress has been made regarding the adoption of the Fiscal Rules Act (passed the first reading in parliament in January 2015 and is expected to be adopted in Q1-2015). The Public Finance Act will be amended within six months of the adoption of the Fiscal Rules Act and will contain detailed provisions defining the drafting, implementation and monitoring of the budget of all general government entities. ·       Some progress has been made with the expenditure review in the healthcare sector. The authorities have indicated that the review will be undertaken in cooperation with the European Observatory on Health Systems and Policies and the World Health Organisation (WHO). A remit for the review has been drawn up and a workshop was held in January 2014 to finalise the proposal. It is intended that the scope will be wider than just expenditure and will include; (i) an analysis of the financing of the health system, (ii) an expenditure review, (ii) a review of the ‘benefit basket’ and (iv) an assessment of health technology. The expenditure review and the National Healthcare Resolution will provide a basis for comprehensive healthcare reform. 
 CSR 2: Based on the public consultation, agree measures to ensure the sustainability of the pension system and adequacy of pensions beyond 2020, encompassing adjustments of key parameters, such as linking the statutory retirement age to gains in life expectancy and encouraging private contributions to the second pillar of the pension system. Contain age‐related expenditure on long-term care by targeting benefits to those most in need and refocusing care provision from institutional to home care. || Slovenia has made limited progress in addressing CSR 2: Some progress has been made in alleviating the pressures on the medium-term sustainability and adequacy of the pension system but key parameters still need to be adjusted.  In January 2015 the results of the evaluation of the impact of the 2013 pension reform were published. Fiscal savings have been realised over 2013-14 and further containment of the pension-related expenditures is expected for the period 2014-20. Elements of a further pension system reform are to be discussed in the context of a White Book, due to be published in mid-2015. The Legal act for the Establishment and Functioning of the Demographic Fund is expected to be adopted in June 2015. No progress has been made regarding the long-term care reform, the blueprint for which was adopted in September 2013. The adoption of the law will be postponed to the end of 2015 in order to tie in with the reform of health insurance schemes. 
 CSR 3: Following consultation with social partners and in accordance with national practices, develop a comprehensive Social Agreement by the end of 2014 ensuring that wage developments, including the minimum wage, support competitiveness, domestic demand and job creation. Redefine the composition of the minimum wage and review its indexation system. Take measures for further decreasing segmentation, in particular addressing the efficiency of incentives for hiring young and older workers and the use of civil law contracts. Adopt the Act on Student Work. Prioritise outreach to non-registered young people ensuring adequate public employment services capacities. To increase employment of low-skilled and older workers, adapt the working environment to longer working life and focus resources on tailor-made active labour market policy measures, while improving their effectiveness. Address skills mismatches by improving the attractiveness of vocational education and training and by further developing cooperation with the relevant stakeholders in assessing labour market needs. || Slovenia has made some progress in addressing CSR 3: Some progress has been made regarding wages, with the exception of the minimum wage. The Social Agreement (SA) has been fully accomplished (concluded in January 2015).  The SA establishes the basis for private sector wage setting on ground of collective agreements, inflation and a share of sectorial productivity while growth of public sector wages has to lag behind private sector wage growth. The SA does not address the minimum wage. The evaluation of the 2013 labour market reform shows that some progress has been made in addressing labour market segmentation. Limited progress has been made in addressing the employment of low-skilled and older workers. The Student Work Act has been adopted. The draft Act on Occasional Student Work was incorporated into the December 2014 Public Finance Balance Act and entered into force in February 2015. Some progress has been made regarding the Youth Guarantee Programme. The implementation of Youth Guarantee Programme is on track. 22,000 young are included in the measures; 90% of them received an offer from the public employment services Some progress has been made in addressing skills mismatch. In 2014 a proposal for the Act on the Slovenian Qualifications Framework was prepared and the Scholarship Act came into force. Scholarships for deficient professions will be awarded starting from January 2015. The employment services are preparing a biannual forecast of deficient occupations in parallel with the establishment of the National Career Point. 
 CSR 4: Complete the privatisation of NKBM in 2014 as planned, prepare Abanka for privatisation in 2015, continue the prompt implementation of restructuring plans of the banks in receipt of State aid and the necessary consolidation of the banking sector. Based on the lessons from the asset quality review and stress test finalise the comprehensive action plan for banks in August 2014, including specific measures to improve governance, supervision, risk management, credit approval process and data quality and availability. Reinforce banks’ capacity to work out non-performing loans by strengthening the internal asset management and restructuring units. Clarify the mandate of the Bank Asset Management Company by publishing a comprehensive management strategy and business plan by September 2014, detailing its role in restructuring of its assets, redemption targets, budgets, asset management plans and expected returns, while ensuring adequate resources. || Slovenia has made some progress in addressing CSR 4: Further progress has been made regarding the privatisation of NKBM. Binding offers for NKBM have been submitted. Negotiations are in the final stage and the government aims to sign the sales agreement in the first quarter of 2015. The privatisation process of Abanka is expected to be launched only in January 2016 once the merger with Banka Celje is completed. The operational restructuring of the four major state-owned banks (NLB, NKBM, Abanka and Celje) and the wind-down of two smaller domestic banks are on track. Substantial progress has been made regarding further stabilisation of the banking sector. The recapitalisation of Abanka was implemented in October 2014 and the recapitalisation of Banka Celje took place at the end of 2014. Some progress has been made regarding the banking sector action plan. A comprehensive action plan for banks has been finalized and submitted to the Prime Minister office in January 2015. Bank of Slovenia has ensured follow-up of the shortcomings identified by the 2013 AQR and will resume on-site inspections in Q1-2015 to verify whether the recommendations have been implemented by banks.  Some progress has been made regarding the banks’ workout capacity. The major banks have reorganized and reinforced their work-out and restructuring units. Substantial progress has been made regarding the Bank Asset Management Company (BAMC), which has set out its strategy and business plan and is fully operational. Certain amendments to the legislation still need to be adopted. 
 CSR 5: Continue to implement the privatisations announced in 2013 with the time-frames set. Adopt a strategy for the Slovenian Sovereign Holding (SSH) with a clear classification of assets in line with the timeline and definitions established in the 2014 Slovenian Sovereign Holding Act. By November 2014, commit to a short-term (one- to two- year horizon) divestment schedule for a number of well-targeted assets with a clear time scale. Make it fully operational as a vehicle for the management of assets remaining in State ownership and divestment of the assets earmarked according to the management acts, within the time frame stipulated by the law. By September 2014, adopt and implement a corporate governance code for state-owned enterprises to ensure professional, transparent and independent management. || Slovenia has made some progress in addressing CSR 5: Some progress has been made regarding privatisation. Three companies from the list of 15 have been divested, including Aerodrom Ljubljana, while direct state ownership in one company has been diluted following a debt-to-equity swap. The sale of Telekom Slovenije and NKBM, the two biggest assets on the list, is at a final stage. Signing expected in April and March 2015 respectively. Limited progress has been made in adopting the SSH strategy and the short-term divestment schedule for state-owned assets. Substantial progress has been made regarding the operationalization of the SSH. In December 2014 the SSH has adopted an Asset Management Policy and a management contract between the SSH and the Government is signed, determining the payment of management fees to the first. In December 2014, an open public process was launched for compiling a list of candidate members for the new supervisory board of SSH. A special committee is evaluating the submitted applications. In January 2015, a compliance officer was appointed by SSH. In January 2015 SSH became the sole owner of PDP. In October 2014 SSH acquired all the assets previously owned by DSU. ·       The new corporate governance code was adopted by the supervisory board of SSH in December 2014. 
 CSR 6: Finalise a corporate restructuring master plan by the end of 2014 within clear priorities and effective implementation process. Set up a central corporate restructuring task force monitoring and coordinating the overall restructuring process, providing the necessary expertise, guidance and advice, and facilitating the negotiation process between all stakeholders involved. Establish a list of the most urgent restructuring cases, while maximising the recovery value for creditors. Promote the use of the available legal mechanisms and international best practices to all stakeholders in the restructuring process. Evaluate recent changes in the insolvency legislation by September 2014, being ready to introduce any additional necessary measure. Further reduce the length of judicial proceedings at first instance in litigious civil and commercial cases including cases under the insolvency legislation, and the number of pending cases, in particular enforcement and insolvency cases. || Slovenia has made substantial progress in addressing CSR 6: Both the corporate restructuring master plan and the central task force have been established. In December 2014 the restructuring master plan has been finalised. In January 2015 a centralised corporate restructuring task force was established to monitor and coordinate the overall restructuring process, to facilitate the negotiation process between all stakeholders involved, to promote the use of the available legal mechanisms and out-of-court solutions and to provide the necessary guidance and advice. Substantial progress has been made regarding the restructuring of the most urgent restructuring cases.  The evaluation of recent changes in the insolvency legislation has been fully addressed. In January 2015, the authorities presented the advanced version from an ongoing evaluation exercise of the laws adopted in 2013 which amended and complemented the insolvency law. The authorities do currently not see a need for further amendments to the insolvency framework. The key finding of the evaluation is that the new framework allows more restructuring opportunities to companies in financial difficulties. Some progress in reducing the length of judicial proceedings at first instance in litigious civil and commercial cases (incl. cases under the insolvency legislation) has been made, however the length of trials and backlogs remain still significant. 
 CSR 7: Reduce obstacles to doing business in Slovenia in key areas for economic development rendering the country more attractive to foreign direct investment particularly through accelerated liberalisation of regulated professions, reduction of administrative burden including leaner authorisation schemes. Ensure sufficient budgetary autonomy for the Competition Protection Agency (CPA) and increase its institutional independence. Streamline priorities and ensure consistency between the 2011 Research and Innovation and the 2013 Industrial Policy Strategies with the upcoming strategies on Smart Specialisation and Transport, ensure their prompt implementation and assessment of effectiveness. || Slovenia has made some progress in addressing CSR 7: Limited progress has been made regarding the promotion of FDI. The new FDI Strategy is expected to be adopted in Q1-2015. Some progress has been made regarding the deregulation of professions. The number of regulated professions has decreased from 323 to 242 Some progress has been made regarding the reduction of administrative burden. 25% of measures included in the Single document were implemented. Substantial progress has been made in ensuring sufficient budgetary autonomy for the Competition Protection Agency and in maintaining its institutional independence. No progress has been made regarding leaner authorisation schemes and the implementation of the National Research policy and Slovenian Industrial policy. Some progress has been made regarding the Smart Specialization Strategy. The adoption of the Strategy is foreseen in April 2015. Some progress has been made regarding the Comprehensive Transport strategy. Public and cross-border consultations on the draft strategy (dated 15 October 2014) were held and the draft is foreseen to be revised to reflect the relevant observations and comments received. The strategy is expected to be adopted in September 2015. No progress has been made regarding the streamlining of priorities and ensuring consistency among the existing strategies. 
 CSR 8: Take effective measures to fight corruption, enhancing transparency and accountability, and introducing external performance evaluation and quality control procedures. || Slovenia has made some progress in addressing CSR 8: Some progress has been made regarding the fight against corruption. The new government reiterated its commitment to fight corruption and adopted a new two-year programme of 11 perennial measures in January 2015. Some progress has been made regarding transparency and accountability. A comprehensive public-sector reform is in public consultation and is expected to be adopted by the end of February 2015. No progress has been made regarding  performance evaluation and quality control procedures. 
 Europe 2020 (national targets and progress) 
 Employment rate (%): 75 % || In 2013 Slovenia moved away from the target (63.3 % in 2013 comparing with 64.1 % in 2012), although quarterly data in 2014 show some improvement. 
 R&D target: 3 % of GDP || R&D intensity in Slovenia increased from 1.36 % in 2000 to 2.59% in 2013. During the period 2007-13, R&D intensity grew at an annual rate of 7.8 %. If this trend is sustained, Slovenia’s R&D intensity target of 3 % for 2020 is achievable. In spite of the economic crisis, business expenditure on R&D as a percentage of GDP increased from 0.79 % in 2000 to 1.98 % in 2013, making Slovenia one of the top performers in the EU in terms of business R&D. Slovenia is therefore on track to meet its R&D intensity target of 3 % for 2020. The main challenge remains the efficient and effective use of available resources in order to secure the economic benefits of this investment. 
 National Greenhouse gas (GHG) emissions target: 4 % increase in 2020 compared to 2005 (in non-ETS sectors) || According to the latest national projections and taking into account existing measures, Slovenia is on track to meet its target on GHG emissions in the sectors not covered by the EU Emissions Trading System (ETS), as GHG emissions are projected to increase by around 4 % (compared with 2005) by 2020. By reducing emissions by 7 % between 2005 and 2013, based on latest projections the interim target for 2013 will be overshot by a margin of 9 percentage points. 
 2020 Renewable energy target: 25 % Share of renewable energy in all modes of transport: 10 % || Slovenia has increased its renewable energy share to 23.5 % (2013) from 20.9 % in the previous year; while the renewable share in transport has increased to 2.9 % (2012) from 2.1 % in the previous year. Progress is fairly steady and on track towards the 2020 target (25 %). There are no complaints or EU pilot/infringement procedures against Slovenia concerning the Renewable Energy Directive. 
 Energy Efficiency target: 10 809 GWh saving   By 2020: level of 7.31 Mtoe primary consumption (5.09 Mtoe expressed in final energy consumption)   || Even if Slovenia’s current primary energy consumption (6.9 Mtoe in 2012) is slightly below its 2020 target, additional efficiency-related efforts are needed to keep primary energy consumption at this level or to minimise any rise if GDP increases again during the next six-year period. The target was set at a rather unambitious level and Slovenia is among the very few countries which failed to submit its National Energy Efficiency Action Plan. Only limited progress has been made in implementing the Energy Efficiency Directive and the Commission is closely monitoring its transposition. 
 Early school leaving target: 5 % || The target has been achieved. Early school leaving fell from 5.6 % in 2006 to 3.9 % in 2013. 
 Tertiary education target: 40 % || Tertiary education rates improved steadily and reached the target in 2013 (40.1 %) 
 Target for reducing the population at risk of poverty or social exclusion: 40 000 (compared to 360 000 in 2008) || Poverty and social exclusion continued to increase in Slovenia in 2013, taking the country further away from its target (320 000). The number of people at risk of poverty or social exclusion rose to 410 000 in 2013. 
 Table AB.1:     Macroeconomic indicators 
 Source:  European Commission 2015 winter forecast; European Commission calculations 
 Table AB.2:     Financial market indicators 
 Source:  IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators). 
 Table AB.3:     Taxation indicators 
 Source: European Commission. 
 Table AB.4:     Labour market indicators 
 Source: European Commission (EU Labour Force Survey and European National Accounts) 
 Table AB.5:     Social indicators 
 Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 
 Table AB.6:     Product market performance and policy indicators 
 Source:  European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators). 
 Table AB.7:     Green Growth 
 Source:  Eurostat unless indicated otherwise; ECFIN elaborations indicated below. 
([1])  This indicator measures the increase in
the value of exports of goods and services relative to the increase of export-weighted
imports of goods and services of 36 trading partners.
([2])  The label ‘active deleveraging’ is used
when negative credit flows are the main driver of the reduction in debt/GDP
ratios (because of its effect on the nominal size of the sector’s balance
sheet). ‘Passive deleveraging’ refers to the situation when nominal GDP growth
drives or contributes to the debt-to-GDP reduction.
([3])  ‘Excess debt’ is the debt of companies
which are highly leveraged, i.e. have a leverage ratio exceeding 5 — a commonly
accepted credit risk threshold. 
([4])  Annex 1 to Bank of Slovenia’s stability
of the Slovenian banking system report of December 2014
(https://www.bsi.si/en/publications.asp?MapaId=1357)
([5])  According to analysis of the Institute
of Macroeconomic Analysis and Development of the Republic of Slovenia (IMAD).
([6])  Quarterly report on the euro area. Volume
13 (2014) Issue 3.
([7])  For more details, please consult
information published on the ECB web page: https://www.ecb.europa.eu/ssm/assessment/html/index.en.html
([8])  NLB issued a EUR 300 million three-year
unsecured bond at a 3% yield on the Luxembourg market. Further bond offerings
are envisaged in the near future.
([9])  There are few exceptions. Sperbank
increased its balance sheet from EUR 904 million in 2009 to EUR 1.5 billion in
2013. 
([10]) In 2014 some Slovenian corporates
managed to issue unsecured bonds amounting to EUR 200-300 million in the
domestic market at lower rates than those offered by the banks.
([11]) The debt leverage ratio represents the
level of debt relative to the company's cash flow capacity. The debt leverage
ratio is defined as the total financial debt net of cash and cash equivalents
on balance sheet divided by the earnings before interest, tax, depreciation and
amortisation. Companies are defined as "highly leveraged" if their
leverage ratio exceeds 5 - a commonly accepted credit risk threshold.   
([12]) According to analysis of the Institute
of Macroeconomic Analysis and Development (IMAD) based on data provided by the
Agency of the Republic of Slovenia for Public Legal Records and Related
Services (AJPES).
([13]) EBITDA margin is defined as EBITDA
divided by revenues. It is commonly used proxy for cash flow and it indicates
the ability of a company to service debt. 
([14]) The BAMC is classified inside the
general government sector as it is, according to Eurostat treatment, a 100 %
government-owned entity with no autonomy of decision.
([15]) State-owned enterprises are defined as
companies in which the state has a majority ownership (50%+1). State-controlled
enterprises are defined as companies in which the state has at least a
controlling minority ownership of (25%+1).     
([16]) Before the establishment of the SSH,
the direct ownerships of the Republic of Slovenia were managed by different
asset management companies, the last one being the Capital Assets Management
Agency (AUKN), created in the context of Slovenia's OECD accession in 2010.
Other state funds, such as KAD (the state pension fund), SOD (the state
restitution fund), PDP (the state fund for distressed assets), and DSU (the
former development corporation) also owned and managed state assets separately
from the AUKN. However, the ownership and management of state assets has been
significantly consolidated since the SSH was established, as the SSH has
gradually acquired or merged with all former state funds, except KAD, which
remained independent.  
([17]) Level of importance of SOEs/SCEs is
defined according to sales, assets, equity, profit, loss, financial debt,
employees.
([18]) In all graphs, sector definitions
follow the NACE Rev. 2 classification, e.g. consumer staples - manufacturing of
consumer staples (food, tobacco, textiles, wood and cork, paper, printing,
etc.); other manufacturing (jewellery, musical instruments, sports goods, games
and toys, medical and dental instruments and supplies); other services (legal
and accounting, management consultancy, architectural, engineering, scientific
research and development); materials - manufacturing of materials (rubber and
plastic products, non-metallic mineral products, basic metals); ICT -
information and communication technologies; durables -manufacturing of durables
(fabricated metal products, electrical equipment, machinery, motor vehicles,
trailers, other transport equipment); chemicals and pharma – manufacturing of
chemicals and pharma (coke and refined petroleum products, chemicals and
chemical products, basic pharmaceutical products).
([19]) 2013 Indicators of Product Market
Regulation comprised by OECD: http://www.oecd.org/economy/growth/indicatorsofproductmarketregulationhomepage.htm#Sources

([20]) The performance of the banking and
financial sector is examined separately in Section 2.1 as their performance indicators
are different from those for NFCs. Comparison of performance (profitability and
indebtedness) with national and regional peers is based on a simple regression,
controlled for year, industry and type of ownership (SOEs/SCEs, private
domestic and private foreign). Financial performance and productivity of the
energy, transport and utilities sectors are only analysed relative to regional
peers as these sectors are natural monopolies and are dominated by SOEs/SCEs in
Slovenia and in other countries. Therefore, comparison with foreign and
privately owned national peers is not relevant.  
([21]) The (debt) leverage ratio represents
the level of debt relative to a company's cash flow capacity. It is calculated
as the total financial debt net of cash and cash equivalents on the balance
sheet divided by the earnings before interest, tax, depreciation and
amortisation (EBITDA). Companies are defined as highly leveraged if their
leverage ratio exceeds 5 - a commonly accepted credit risk threshold for NFCs. 

([22]) The financial services sector does not
include banks and insurance companies but only other financial services such as
investment funds and leasing companies. This category also includes most of the
financial holdings which invested in companies using high leverage (debt) and
low proportion of own equity. 
([23]) The operating profit, which is
represented by the earnings before interest, tax, depreciation and amortisation
(EBITDA) on the profit and loss account, is commonly accepted  proxy for the
cash flow capacity of a company.     
([24]) Return on equity (ROE) defined as the
amount of net income returned as a percentage of shareholders equity. ROE is a
measure of a company's profitability, revealing how much profit a company's
generates with the money shareholders have invested.
([25]) Return on capital employed (ROCE) is
defined as the amount of operating profit (earnings before interest and tax,
EBIT) as a percentage of capital employed (the sum of shareholders' equity and
debt liabilities). ROCE is a measure of a company's profitability and the
efficiency with which its capital (both debt and equity) is employed.     
([26]) Following the approach in a recent
World Bank study (Iootty, M., P. Correa, S. Radas, B. Skrinjaric (2014).
Stylized Facts on Productivity Growth: Evidence from Firm-Level Data in
Croatia. Policy Research Working Paper, No. 6990, the World Bank), labour productivity
and total factor productivity are used as important performance indicators. To
calculate labour productivity value added and employment are used, while for
total factor productivity (TFP), the methodology by Levinsohn and Petrin is
implemented (Levinsohn, J., & A. Petrin (2003). Estimating Production
Functions Using Inputs to Control for Unobservables. Review of Economic
Studies, Vol. 70, No. 2, 317-342), which corrects for productivity shocks
unobserved by the researcher but observed by the firm. The estimates are based
on a simple regression controlled for year, industry and ownership type
(SOEs/SCEs, private domestic and private foreign ownership).   
([27]) This takes into account all direct
capital/ equity increases of state-owned or state-controlled banks done by the
state from 2007-2014, including the conversion of CoCo bonds (contingent
convertible bonds, converted into cash if certain conditions are fulfilled) and
other hybrid bonds issued by the state. It does not include the support provided
to Probanka and Factor banka as these were not SOEs/SCEs before they were
recapitalised by the state. It is reduced by dividends paid and any gains IPO/
SPO transactions for the period 2007-2014. It also includes the cost of setting
up the BAMC (EUR 1.7billion in equity and bonds) as this is consolidated with
general government accounts following, according to Eurostat treatment.        

([28]) Foregone profits are estimated by
comparing the profitability of SOEs/SCEs to profitability of all corporates in each
sector (as listed in Table 3.2.2). In sectors where SOEs/SCEs are dominant and
their position is based on natural monopolies), comparing profitability to national
peers is not relevant and hence the sector has been excluded from the estimate
(e.g. public utilities). Foregone profits in the energy sector are based on
comparison with regional SOEs/SCEs peers, using data from Orbis database.
Forgone profits are calculated by measuring the difference between ROE of SOEs/SCES
and ROE of the all companies in each sector and multiplying this difference
with the equity of SOEs/SCEs in each of the years. The same approach is applied
to net margins and sales of SOEs/SCEs and finally the average based on ROE and
net margin differences is taken as the cost of foregone profits.
([29]) Soft budget constraints (a concept
formulated by Kornai, 1979) arise wherever a funding source – e.g. a
state-owned bank – finds it impossible to keep an enterprise to a fixed budget,
i.e. whenever the enterprise can extract ex post a bigger subsidy or loan than
would have been considered efficient ex ante. 
([30]) Quarterly report on the Euro Area -
Volume 13 (2014) Issue 2 - A
competitiveness measure based on sectoral unit labour costs. 
([31]) Matija Lozej,
Bank of Slovenia: Ravnotezni kazalnik konkurencnosti za Sloveijo (only in Slovenian)
([32]) The proportion of employees being paid
less than 105% of the minimum wage was 19.2% in Slovenia, highest among Member
States that have a minimum wage.
([33]) Labour costs at the level of the
minimum wage that include employers’ social security contributions are an
important determinant of labour demand and are among the highest in the EU.
([34]) The peak was to some extent inflated by
the planned end of investment of the highway company DARS. This is a public
company but its investment is treated as private in ESA95/2010. DARS’
investment accounted for about 1½ % of GDP in 2008 and much less thereafter.
([35]) Quarterly Report on the Euro Area, volume
12 (2013), issue 2. Assessing
the impact of uncertainty on consumption and investment.
([36]) Unctadstat uses a different methodology
than the BoS (Graph 3.3.19) and
evaluates Slovenia's stocks of FDI at 32.5% of GDP in 2013.
([37]) http://ec.europa.eu/enterprise/policies/industrial-competitiveness/monitoring-member-states/index_en.htm
([38]) http://ec.europa.eu/priorities/jobs-growth-investment/plan/index_en.htm.
Slovenia submitted 22 projects (mainly in
infrastructure) under the new EU Investment Plan.
([39]) The Ministry of Economy targets an
increase in the FDI stock to reach the EU average by 2017.
([40]) PwC and World Bank (2014), Paying Taxes
2015:  The global picture report http://www.pwc.com/gx/en/paying-taxes/download.jhtml 
([41]) Based on Commission winter 2014 forecast,
EPC agreed long-run convergence assumptions of underlying macroeconomic variables
(real interest rate, real GDP growth, inflation) and the assumption of constant
fiscal policy beyond the forecast horizon.
([42]) The historical SPB scenario assumes  gradual
convergence to the historical average for the SPB beyond the forecast, all
other macroeconomic assumptions as in the baseline 
([43]) The combined historical scenario
assumes gradual convergence to historical averages beyond the forecasts for all main
macroeconomic variables - SPB, implicit interest rate and real GDP growth.
([44]) The SPB is assumed to remain constant at
end-of programme value; all other macroeconomic variables - interest rate,
inflation, growth – over the programme horizon are also taken from the SCPs
([45]) Pension and Disability Insurance
Institute: pension-to-wage ratio 56.6% for the average pension and 61.7% for
the average old-age pension, both -0.3pp compared to 2012.
([46]) 25.5% compared to 15.6% for EU 28 peers
and 14.5% SI population average EU-SILC 2013.
([47]) Progress on policy measures relevant for the correction of
macroeconomic imbalances - Slovenia, October 2014
http://ec.europa.eu/economy_finance/economic_governance/documents/20141224_si_imbalances_epc_report_en.pdf
  
([48]) Such reform will need to take in to
account Member States' obligations under Directive 2011/24/EU
([49]) In 2014, only 12% was used for
education and training measures. Otherwise 40% of ALMP funds was used for
public works, 22% for self-employment and 16% for subsidised employment.
([50]) The Act on Occasional Student work was
incorporated into the Public Finance Balance Act in December 2014.
([51]) Eurydice (2014) Modernisation of Higher
Education in Europe: Access, Retention and Employability.
([52]) During the period January 1991 -
January 2015, the number of bylaws increased from 1 006 to 18 332 and the
number of laws from 356 to 799.
http://www.tax-fin- lex.si/VeljavnaZakonodajaRS.aspx 

([53]) The World Bank Doing Business 2015
estimates that 212.5 days are needed in Slovenia in order to deal with
construction permits – 63 days more than the OECD average. There has not been
any improvement relative to the previous year.
([54]) Flash Eurobarometer 396, “Retailers’
attitudes towards cross-border trade and consumer protection”, 2014 and  Flash
Eurobarometer 397, “Consumer attitudes towards cross-border trade and consumer
protection”, 2014.
([55]) 256 measures are listed in the
document, 64 have been implemented (25%), 104 are being implemented (41%) and
86 are pending for implementation (34%). http://www.stopbirokraciji.si/en/smart-regulation/concrete-realised-measures/
([56]) The share of value added in the business
services sector that is generated by enterprises coming from another EU Member
State.
([57]) Indicators of Product Market Regulation,
OECD http://www.oecd.org/economy/growth/indicatorsofproductmarketregulationhomepage.htm  

([58]) The rate of early-stage entrepreneurial
activity (TEAindex) grew robustly in 2013 and achieved the pre-crisis (2008)
peak of 6.5%. Source Global Enterpreneurship Monitor.
([59]) Start up Manifesto, June 2014; Some
insights into entrepreneurship and start-ups in Slovenia, Austria and Italy,
and Prof. Prof. dr. Miroslav Rebernik Mag. Matej Rus, Dec 2014.
([60]) For investments into R&D the
government offers a 100% reduction rate, depreciation allowance, reduced
taxable base for royalties. They also offer a 40% tax relief for investment in
tangible assets. 
([61]) Slovenia has 3.1 PTC patents per
billion GDP compare to the 3.9 at EU level (2010) and 6.9 % of high cited
scientific publications compare to the 11% at EU level (2009). Slovenia ranks
below the EU average on the Innovation Output indicator and the Innovation
Union Scoreboard.
([62]) Natura 2000 Barometer, The Natura 2000 Newsletter, July 2014.
([63]) Czernich, N., O. Falck, T. Kretschmer,
L. Woesmann (2011) Broadband Infrastructure and economic growth, The Economic
Journal, 121 (552), pp. 505 532
([64]) Slovenia has 0.84% share of
e-procurement (in total procurement), compared to 13% reached at the EU level. 
([65]) OECD Public Governance Review –
Slovenia 2012
([66]) The forthcoming 2015 EU Justice
Scoreboard (March 2015)
([67]) Flash Eurobarometer 397, “Consumer
attitudes towards cross-border trade and consumer protection”, 2014.
([68]) The following categories are used to
assess progress in implementing the 2014 CSRs:
No progress: The Member State has (MS) neither announced nor adopted measures
to address the CSR. This category also applies if the MS has commissioned a
study group to evaluate possible measures. 
Limited progress: The MS has announced some measures to address the CSR, but these
appear insufficient and/or their adoption/implementation is at risk. 
Some progress: The MS has announced or adopted measures to address the CSR. These
are promising, but not all of them have been implemented and it is not certain that
all will be. 
Substantial progress: The MS has adopted measures, most of which have been implemented.
They go a long way towards addressing the CSR. 
Fully addressed: The MS has adopted and implemented measures that address the CSR
appropriately.